Public sector companies are now trading at attractive valuations. Advait Dharmadhikari finds out whether PSU companies make good investment bets amid the election season or they are value traps that are best avoided.
Investors have been told for years that terrific companies with high growth rates, quality management, and businesses with a competitive advantage will lead to wealth creation. However, historically it has been observed that great companies do not always make great investments if they are not bought at a margin of safety. For example, Hindustan Unilever was the darling of the stock markets in the early 2000s. The stock was trading at Rs 248 in March 2000. In August 2010, the stock was still trading around the same levels. The moral of the story is that there always needs to be a margin of safety in the purchase price of any stock.
Public sector stocks have not found favor with the markets for a long time. These companies have traditionally destroyed a lot of investor wealth. However, as they say, “With the crisis, there comes an opportunity.” The price damage has pushed public sector companies to very cheap valuations. However, the green shoots are now visible in some of these companies.
Over the past few years, public sector banks have been plagued with the problem of non-performing loans. As RBI forced the banks to recognize bad assets and make the necessary provisions, the banks took a substantial hit on profitability. The government has taken several initiatives to revive the struggling banks, including programmes like Indradhanush for bank recapitalization.
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