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MF positioning in PSUs finally starts expanding. Can see more shift over the next few months

* After a strong acceleration in domestic smallcap flows in May’23 to Oct’23 period, momentum has started stabilizing over the past few months at ~INR 3600 crores (Jan’24 inflows @ INR 3,250 crores).

* Inflows into Midcap funds continued at an average rate of ~INR 2,000 crores over past 1-year. Large cap flows continue to remain weak, although inflow of INR 1,290 crores in month of Jan’24 is largest in 18-months.

* Interestingly, after Smallcaps, the 2^nd strongest category witnessing inflows over the past 6-months is Sectoral & Thematic funds. Biggest inflow in this category is in Manufacturing (INR 5300 crores), India Opportunity (INR 4600 crores), Infra & Power (INR 3,000 crores), Consumption (INR 1,600 crores), PSU (INR 1,200 crores), Pharma funds (INR 720 crores) and Commodity (INR 620 crores) funds.

* New folio addition in Small cap schemes continue at a rapid pace with no signs of slowdown. Since Jan’23, 8mn new folios have opened in small cap category v/s 3.1mn in midcap and 0.45mn in large cap. Almost 35-40% of incremental folio additions continue  to be in smallcap category.

* Cash levels of Large cap schemes continue to deplete at a very fast pace as most FMs keep deploying here on back of strong relative valuation support.

* Midcap cash levels also dropped to 3.8%, which is lowest since Sep’21. We are witnessing a consistent drop here since Apr’23.

* After a round of deployment in Dec’23, Small cap cash has again increased in Jan’24. The rate of inflows continues to remain strong here while deployment opportunities at reasonable valuations are scarce. Almost 80% of the schemes in this category increased cash in Jan’24 with a median increase of 70bps.

* The sharp collapse in Global Value trade in 2017 resulted in a drop in PSU holdings in MF portfolio from 2018 until 2020 (from 14% of AUM in Oct’17 to 9% by Oct’20). We saw a global revival in Value trade in 2021 which resulted in the 1^st leg of chasing in PSU stocks in India too. However, the leg of 2021-2022 was restricted to few large cap PSU stocks only.

* This participation has finally started turning broad since Oct’23 (also many new PSU names have got listed in the past few years). The proportion of PSU holding has just broke to a 3-year high in Jan’24 as more funds start entering the trade (also due to sharp outperformance of many PSU stocks resulting in alpha chasing).

* The breadth of MF participation (as measured by average number of PSU stocks held by an active scheme) has started spiking sharply since Oct’23. This is because of the sharp outperformance in this pocket compared to the overall markets.

* There is a desperation to participate in the PSU story hence we are seeing players mining deeper and adding more PSU names to the portfolio.

* Average count of PSU stocks in a scheme ex-SBI has already reached closed to the number last seen in 2013. However, the total positioning (size of positions) in these names is still much lower compared to the history. It seems that many funds have skeptically started increasing the breadth of participation in PSUs but size of position is still low when compared to history.

* In the current report, we look at some key PSU stocks and their holding changes over the last few years.

* PSU stocks have been losing MCAP sharply since 2009. We saw a small recovery in 2014-2015 period (post MODI victory for the 1^st time) and then in 2016-2017 period (post Demonetization and Banks recapitalization plans). However, both were short lived and PSU kept losing MCAP relative to overall markets. It finally dropped to 8% by Nov’20 from where we saw a resumption in Global Value trade.

* Currently the ratio has reached back to 2017 zone but still rising rapidly. In this context, we have tried to see how MFs are already positioned in PSU stocks and where we could see participation coming back sharply in order to chase this trade. 

In the report, we have showcased 4 charts for most large PSU stocks.

1.    Number of schemes holding the stock- To gauge the breadth of participation.

2.    Number of shares held by all active schemes- To show the actual change in positioning.

3.    Total allocation of active schemes- To show the holding as a % of AUM.

4.    Average allocation of active scheme- This is equal weight allocation to gauge if holding is broad based on concentrated into a few large schemes.

Analysing the stocks only on the above 4 parameters, we have the following observations:

1.    SBI, BPCL, Bank of Baroda, ONGC, IOCL and Bharat Electronics have seen a decrease in positioning over the last few years. Hence, they can see resumption in buying interest.

2.    Among the above names, participation in ONGC has just begun last month.

3.    BPCL remains most attractively positioned purely based on MF holdings. It has seen big trimming of positions (most schemes remain invested in HPCL) while number of schemes holding the stock also remains low.

4.    SBI, being a large cap stock is already owned broadly but most schemes have trimmed their holding. Hence can be a good risk adjusted bet if one wants to play the PSU rally.

5.    Similar to SBI, holding in Bank of Baroda has come back to a 2-year low zone although participation is fairly broad. Hence, any rescaling of those positions can offer upside. 

6.    Other PSU Banks- PNB, BOI, Union Bank & Indian Bank; all have started witnessing a new high level of participation not seen at least since 2013.

7.    MF positions have been sharply dropping in IOCL since 2021 while number of schemes holding the stock also remains low (26 active schemes). Hence, we can see broadening of participation here.

8.    Power Finance, RECL, HPCL, NTPC, Power Grid, NHPC, COAL, HAL- These names already have higher positioning and participation. Hence may not see strong chasing interest although they could continue performing based on their earnings. 

9.    Among Metals- SAIL has started seeing re-emergence of interest over the past 2 months as many new schemes have started adding positions. Based on the history, the stocks positioning has some more room to increase. NMDC’s positioning and participation are already running on the higher side. 

10.  Many PSU names like – SCI, Hind. Copper, NBCC, Engineers India, Mazagon Dock, MOIL, Gujarat Narmada Valley, Gujarat State Fertilizers, Bank of Maharashtra, Chennai Petroleum, MMTC, GMDC, National Fertilizer, IOB, Central Bank of India etc. have still not seen much participation by MFs in the current PSU frenzy. We could see some of these names getting into portfolios to just participate in this PSU move.