Saturday, March 24, 2012

Does ownership matter (or why I dislike PSU stocks)

( This article appears in the latest issue of Moneylife)One thing that is clear to all of us now is that when selecting stocks, a conservative investor has to look at ownership as well as the nature of business as two primary selection points. Of course, we have all the fundamental and technical analyses that one is comfortable with, but to me, these two factors will form the basis for primary inclusion or exclusion. As regards nature of business, there are many measures and I will simply state that I like companies that have business which is not vulnerable to regulatory fiats and are in the top two or three of their industry. Also, I prefer businesses that are consumption driven (FMCG, Pharma, Housing Finance etc) rather than a business to business model. For me, more important is ownership. The thing I will avoid is government of India ownership. This may sound surprising given the fancy for stocks like PSU Banks, BHEL, Coal India and its likes. I am comfortable not having any of these in my stock portfolio amongst my core holdings. Government of India ownership is an issue with me because the business focus is simply absent. There is no continuity in a business plan as the CEO’s keep changing frequently and no one person is allowed to have a long range vision and carry it through. Perhaps the concerned ministries do have some kind of plans for companies in their fold, but it is subject to the personal whims and fancies (apart from political pressures) of a particular minister. And none of the considerations could actually be helping the company to earn more money. If one says that the role of a PSU is to look beyond profits, then my submission is that these companies should be delisted. Let the government become the sole owner and do what it pleases. Once an outside shareholder is included, the main obligation is to create value for the shareholder. And this can be done only by generating more profits. This means that companies like the public sector banks, should be free to lend where they want. They should not be compelled to lend to any group or sector which the government directs it to do. As a shareholder, my concern is that the bank is being forced to lend in to high risk areas and not at the best possible pricing. I know this sounds very commercial, but investing in shares is a commercial decision and not a patriotic act. I can write books about the flaws in the public sector management capabilities and delivery, but in short, I will skip investing in shares of companies belonging to this promoter. Having excluded the public owned companies, we are left with the private sector companies. By no means are these saints. In fact, in most cases, I am hesitant to even shake hands with the promoters, for fear of losing my fingers. Most promoters use the companies as their personal fiefdoms, providing money plucking opportunities to kith and kin. The shareholders get what is left. The returns that come to the promoter shareholders and the others shareholders are two different things. However, over the last few years, most promoters have realised that long term wealth creation (by having high share prices) is also important, the other shareholders also gain. For instance, if I own 70% in my company, I may prefer not to siphon out a couple of crores since the increased reported EPS would help to increase market capitalisation by a greater amount. This goal is in sync with the other shareholders. Personally, I put my investments in Indian promoter companies under ‘speculative’ rather than investment category, simply because I cannot take anything for granted and want a higher level of alertness. I never know when a promoter may sell the business, take a personal ‘non compete’ fee and then use the money to do a strange business. For most Indian promoters, other shareholders are nothing but ‘nuisance’ value, albeit essential. So, when I get in to private sector promoter companies, I know the risks, but am betting on the fact that a higher share price is the common goal. I also know that the promoter is going to take home something far higher than what other shareholder gets, but I look at it as the price one pays for entrepreneurship. Of course, in the private sector, there are also foreign owned companies. Here I am a bit more comfortable since they are all focused on remitting as high dividends as possible. The flip side is the transfer pricing and royalty leakages which happen. However, by and large, most MNC companies listed on our bourses (HUL, Colgate, Nestle etc) have been great investments and as a universe, surely score over Indian family owned companies, from an external shareholder point of view. There is another category of ownership, where there is no single group of person in control of the shareholding. These are mainly run by professionals and are focused on business growth and profits. To name a few, these include companies like HDFC, CRISIL, L&T, ICICI, Infosys etc., It is possible that in these companies, one person may have an overbearing presence, but these companies will live beyond the individual. Here I am more comfortable that the family ownership model. It would be great if all family owned companies ultimately transform to this model. It looks very unlikely in India, where ‘family’ is important- whether it is company or country.

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