Sunday, April 1, 2012
Governance in PSUs- Great Expectations..
(This column appears in today's Deccan Chronicle / Asian Age)-1st April 2012 A fund manager has taken Coal India to court. The accusation is that the Board of Directors acted on instructions of the Ministry. And this conformation has cost Coal India a lot of money in missed profits. Institutional activism has made its beginning and one hopes that this is a sign to other fund managers (especially the Indian mutual fund ones) that they can actually influence the way a company functions. Most of the PSU companies are but puppets of government policies that are dictated by politics of survival. Take the case of our amazing oil companies. They deal in products where the selling prices are controlled by political motives and the cost price is a function of global prices and government taxes (in fact oil is heavily taxed by state governments also). This results in the oil marketing companies perennially being at the receiving end in terms of cash flows and profits. Of course, the government has ensured that they enjoy a huge monopoly, by bottling competition. Private players like a Reliance or Shell or Essar stand no chance of competing in domestic markets, because the market will not go to them, when they can buy the same products far cheaper at GOI owned petrol pumps, even if they are heavily adulterated. So, the private sector companies survive by importing crude and exporting the finished products. And if we take the valuation of companies like BPCL, HPCL or IOC, we should throw all the rules out of the window. If there was no government intervention in their products, the market cap of these companies would have been anywhere between five to ten times of what they currently are at. In addition to all this, surely, being government owned companies, there must be tremendous inefficiencies. High overheads, low productivity, excess labour, lack of competitive environment and an inability or unwillingness for strategic planning as the CEO role is merely temporary and the Board is appointed by government. More often than not, Board positions in PSUs are used to create parking slots for retired government officials who have been good to their bosses in the sunset of their careers. Anyone in a PSU who is very good, would normally be snatched away by the private sector, unless the position enables one to make money on the side or one is a committed government employee for the perks and pensions that go along with it. Succession planning, project suitability for a company, dividend payouts etc are dictated by the promoter shareholder (GOI) . Given the political equations in this country, it looks very unlikely that companies like our Oil sector PSUs would ever become full fledged private sector companies. The Ministers will never let go of a hen that lays golden eggs. So, whilst the PSU companies have great business franchises and poor competition (a gift of ownership) they do not excite any investor. Sure, a lot of FIIs and domestic institutions like LIC hold shares in all PSUs. To me, the FII is buying in because it feels that at some point, GOI will free their hold on these companies. Domestic institutions hold these, because they HAVE TO. Look at the circus of LIC subscribing to PSU bank shares on ‘private placement’ merely to ensure that the GOI receives some money by this so called ‘dis-investment’. When we invest in shares of PSU companies, we give in to HOPE than to reason. HOPE, that one fine day, the babus will give up the government hold on these companies and let the companies be players in a free market. Well, I do not subscribe to this and if you do, good luck to you. I may be proved wrong, but it will take a few decades and radical change in socialist thinking. Parties like DMK, Communists, TMC will oppose privatisation tooth and nail. And opportunistic opposition, whether it is BJP or Congress, will also oppose it for the sake of opposing it. Ownership and management in private sector is not far better, but they are creatures of free markets. A promoter, who steals excessively from his company, will naturally have lower reported profits. There is no corporate governance in these companies either, but at least they have the goal of higher and higher market capitalisation in order to maximise their wealth. This is a goal that any investor will appreciate and will join the ride. PSU Stocks are preferred by many investors due to the fact that the PSUs enjoy dominant market positions and some of them have control over scarce natural resources. This is precisely what also makes them vulnerable to huge interference from government and its ministers and babus. Most would tend to be run by IAS guys, irrespective of their suitability for the job. And there is often a problem in having a strategic vision and execution. We have often seen PSU banks getting Chairmen whose tenures rarely extend beyond three to five years. Whilst government owned companies may be in great businesses and enjoy dominance, it is not in their blood to care for minority shareholders. So, I would be hesitant to put large moneys in to stocks of PSU stocks. Of course, there was a time when no one wanted these stocks and UTI / LIC ended up ‘buying’ and holding these. The value has gone up manifold from then. But, I am not sure that we can expect anything like that from present levels. Unless, the government vacates the boardroom of these companies in toto, I will not put money in their stocks.