Probable EPFO buying pushed PSU stocks higher

MUMBAI: The allure to own a public sector enterprise (PSU) stock seems to be in vogue once again. On Thursday PSU stocks such as STC India, NBCC, Hindustan Copper, MMTC, MTNL, GAIL and SCI surged between 5-20 per cent, and their trading volumes were around 2-20 times more as compared with their 10-day average.

There are two factors which are driving the volumes in these PSU stocks. First being the hope of owning the stocks which may be a key holding in the EPFO portfolio. Many smart investors are lapping up the government owned companies' stocks on the expectations that these stocks may probably one of the key holdings in the portfolio of Employee provident funds (EPFO).

Usually, PSUs are perceived to have lower volatility, both in terms of stocks as well as the earnings, hence they are likely to be the first choice of a risk averse EPFO fund manager. According to the government directive, EPFO can now invest 5-15 per cent of their incremental corpus in equity markets starting this July. For the current year, EPFO will initially start with 1 per cent of the incremental corpus and which would be increased later to 5 per cent by March next year. This means EPFO could invest Rs 4000-5000 crore in equities this fiscal year.

The second reason for the interest in the PSU stocks is the investors intention to invest through Exchange traded funds (ETF) as a preferred route initially. Hence, aiding the government’s plan of divestment through ETF route, this could set a smooth sailing of the plan.

“Govt could do divestment by forming an ETF in which 70% of stocks are currently performing well and 30 per cent of stocks that have yet not started performing too well. This could make the passage easier for the government to divest, and this can get a fair response for EPFO. These govt ETFs may give equity IRR of 12-14% which is quite attractive for EPFO fund manager.” says Prakash Diwan of Altamount capital management.