Wednesday, February 17, 2010

PSU stocks.

Why I Hate PSU Stocks
February 09, 2010 11:46 AM |
R Balakrishnan on saving and investing prudently

From mindless government interference to wasteful expenditure, the many reasons to shun the stocks of government-owned companies

The planned disinvestment of government (PSU) companies is keeping these stocks buoyant. Normally, when there is a likelihood of fresh supplies (whether it is sugar or potatoes), the market price softens. However, when it comes to stocks, our markets are perverse. Stock prices are actually moving up, in anticipation of divestment! I can understand this in the case of private sector companies—the promoter pushes up the market price. I am sure that even the PSU honchos want a higher price, but one wonders who would want to bid up the prices before an issue. Are the investment bankers creating the demand? Or is it the existing institutional investors who push the prices up, dump it in the market and then buy from the primary issuance?

Of course, the government has now gotten smart. For the initial public offerings (IPOs), the government is talking the right language. It announced some policy changes to benefit NTPC, for instance. The government has a right to do this; after all, it owns the company and it runs the country. However, I have several issues with PSU stocks.

Some of these companies have such low floating stock that market prices are distorted. If the government were to issue stocks of such companies (like MMTC), investors would do best to keep far away and leave institutional investors to guess their true worth.

I only look at whether a public issue from a PSU really changes anything at all. Does it mean that the government would appoint a CEO on merit rather than an officer from the IAS? Will a PSU’s functioning be any different? Will the employment policy be different so that the PSU can attract and retain talent? Will corruption come down? Will PSUs have a long-term business strategy? Or is it that I expect too much? When a PSU offers shares to outsiders or to the public at large, maybe it is irrational to hope for better accountability.

Public-sector banks are prime examples of market listing not making the slightest change. Chairmen still get appointed without having the tenure to think long term. Banks still act as tools for the finance ministry to participate in loan melas, write off loans to fulfil political agendas and then the Reserve Bank of India helps them to window-dress balance sheets by diluting standards of accounting, reporting and governance.

Or look at the irrational wage policies of PSU banks. When the whole world is moving to a ‘cost to company’ concept, banks have agreed to provide pension as a ‘defined’ benefit! Soon, at some stage, the pension bills of the PSU banks will exceed their current wages. Bank employees still get their time-scale increment, so there is absolutely no incentive to work. Promotions and caste-based themes decide everything. The top deck is reserved for the politically influential. Even the write-off of assets is through the inefficient and not very transparent route of asset reconstruction companies (ARCs).

Or take the oil marketing companies. The government’s policy of irrational subsidies has ensured that these companies never realise their true potential.
In spite of all this, why does one still want to invest in PSU stocks? Do fund managers not care only because they are investing someone else’s money? Or is it because they genuinely feel that PSU stocks are comparatively more reliable?
I look at simple things like return on equity (RoE) and see that most PSU units struggle to reach double-digits. They are rich in assets (land, property, etc) as they have built holiday homes, staff quarters, etc. Will these assets actually be sold off?
I will look at PSU stocks when the government sells them off entirely, without retaining any stake and not having any say in the appointment of a single employee. Till then, the PSU basket offers futile hope. Of course, one can take a view that it cannot get worse; so it will get better. As for me, I will chase private sector stocks. I know that some of them may be crooked but many are hungry for performance.

(This has been published in Moneylife as a column)

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