A moat by any other name | Value Research PSU investing has a special set of hazards, and if you tackle them, then some great advantages
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A moat by any other name

PSU investing has a special set of hazards, and if you tackle them, then some great advantages

Like every thinking investor, I have always had an ambiguous attitude towards public sector stocks. Clearly, there are PSU stocks that are great businesses and worthy investments. There's no doubt about that. At Value Research, including our premium Stock Advisor service, we have never shied away from analysing them fairly and recommending them if that's justified.

However, at the same time, I must explain the source of the ambiguity that I feel for PSU investing in general. Investors should always keep in mind what is generally missing in most analyses of these stocks: an explicit discussion of the soft factor that could be quite important in these companies' futures. For want of a better word, I'll call this factor their 'PSUness'.

Despite the government's recent determination to sell off some PSUs, most of these companies will probably be PSUs for the foreseeable future. They could be occupying the commanding heights of the economy (to use an unfortunate historical phrase) or they could be wallowing in its despairing depths, but very few of them will get genuinely privatised. For a long time now, there has been this radical idea around that the government makes for a poor businessperson and it should get out of running these companies. Narendra Modi himself said something like that at least once in his 2014 election campaign. However, that concept, that most PSUs should be sold off as a matter of principle, has never been espoused by the government. By and large, the government's main interest will be to help the fiscal-balancing act by selling some stake when the markets are hot. Basically, that's no different than any promoter trying to encash some value because he needs the money for something else.

For the investor, this means that one of the most crucial things about PSUs will not change in the foreseeable future. This sounds like an impossibly vague factor to evaluate but PSUs are not 'driven' organisations. People who have closely interacted with (or worked in) both the private and public sectors understand this difference very well. 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 shareholders' own priorities don't lie in increasing the value of its holdings. This is the reality.

This also 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. 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.

At Value Research, we are deeply aware of these limitations, and also look to create an advantage out of them. For those planning to invest in these stocks, this carries a clear message. Pay close attention to the conventional business and investing metrics because that is never negotiable. However, at the same time, also focus on what makes a particular PSU privileged and how long those privileges will last.
Warren Buffett's principle of investing in companies with moats is a powerful concept. For PSUs, the nature of the moat is rather special.


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