Widely read:
There has been a fair amount of excitement about public sector stocks in recent weeks. There has been a reasonably high-profile IPO in NHPC; and there are more like Oil India in the pipeline. There are also at least two PSU-focused mutual funds in the pipeline, one from Religare and the other from SBI. Naturally, there has been a fair amount of analyses of these companies’ business, financials and their future prospects. However, what is generally missing in these analyses is an explicit discussion of a soft factor that could well be the most important in these companies’ future. For want of a better word, I’ll call this factor their ‘PSUness’ (I’m sorry that the word is unpronounceable and will in fact sound rude if you try to speak it out).
As the Finance Minister made it amply clear in his budget as well as later, PSUs will remain PSUs, whether they occupy the commanding heights of the economy or wallow in its despairing depths. Many years ago, there was this radical idea around that the government made a poor businessman and should therefore get out of running these companies. That concept has now been formally abandoned. The government’s stake in PSUs will not fall below 51 per cent. Its main interest is to help its budget along by selling some stake when the markets are hot—no different than any promoter trying to encash some value because he needs the money for something else.
For the investor, that means that the most crucial thing about PSUs will not change in the foreseeable future. This sounds like an impossibly vague factor to evaluate but these are not ‘driven’ organisations. Only people who have interacted with (or worked in) both the private and public sectors understand this difference. At the human level, there just isn’t the kind of urge to do better in the public sector. When business is bad, there just isn’t the same kind of desperation to somehow protect and increase profits and therefore enhance shareholder’s wealth. And you can’t really blame those who are running these companies when the majority shareholder’s own priorities don’t lie in increasing the value of its holdings.
And that tells us why investing in the stock of public sector companies is fundamentally different. You are a minority shareholder in a business whose majority shareholder has completely different motives than yours. Nothing can change that, at least nothing that is currently on the horizon. All things said and done, PSUs’ business prospects will remain a function of some special circumstances created by their history. Either there’s a mandated monopoly or a business that is non-replicable for some historical reason, as is amply clear from the various public sector IPOs that have recently concluded or are in the pipeline.
For those planning to invest in these stocks, this carries a clear message. Don’t pay too much attention to conventional business metrics. Instead, focus on what makes a particular PSU a privileged player and how long will those privileges last.
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