To best way to understand the continuing tragedy of India's public sector is to compare and contrast what a private business group talks about its businesses with what the Government of India does. Scan Google for say, Cyrus Mistry's or Anand Mahindra or Kumar Birla's public statements about the various businesses in their groups.
From these gentlemen, you'll find comments about business prospects, future plans, expansion and sometimes about problems. Do the same for the Government of India and all you will find is discussions on how to extract more money out of businesses. The primary topic that excites various parts of the government about the businesses they run is how they can arm-twist the managements to shell out more and more dividend and how can they can sell off shares at inflated prices so as to retain control while extracting yet more money. Once in a while you come across news about how perfectly good businesses like Air India or BSNL or MTNL were ruined by the combined perfidy of promoters (politicians and bureaucrats), management and employees.
It's the year 2014, and no one believes that old rubbish about the commanding heights of the Indian economy from where the public sector started in the 1950s. India's public sector is a diminishing asset. If the cover story of this issue were done a decade ago, it would probably have to be expanded to fifty companies. Today, there are 26. If there's no big course correction, then in 2020 someone may be hard-pressed to do a cover story on ten companies. And those too will be only the 'hard' monopolies where it's simply not possible for a private sector company to operate.
So why then is Wealth Insight bothering you with this special focus on public sector companies? After all, by buying the stock of any of these businesses, you will become a business partner of the Government of India. What's more, you will be a junior business partner. The Government will run the businesses and you'll just have to take it as it comes. You must be wondering that after everything that I have said above, how can I ask you to hitch your investing wagon to the Government?
Simply because as an investor, there is still a great deal of potential in these companies. The negatives that I've listed above are widely known and deeply embedded into the stock prices of these companies. If anything, these negative factors now act as super-signals that drive the price of these companies lower than it should be. At the same time, the public sector companies that are still standing have actually proven that they are great survivors and their advantages are such that they won't disappear in a hurry.
As an investor, this does mean that while you must evaluate these businesses like any other you must also keep in mind issues unique to the public sector. No matter what happens in the business environment, these will never be aggressive and driven organisations. Only people who have interacted with or worked in both the private and public sectors understand this. 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 shareholders' 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.
No public sector CEO sweats over a drop in the EPS the way a private sector CEO does. The basic rules are thus different. However, for investors who understand the different environment, there are still good investment opportunities and that's something that our cover story will help you understand and exploit.
This column first appeared in january 2014 issue of Wealth Insight. This special issue has comprehensive coverage and review of all promising PSUs.
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