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PSUs Being Taken For Granted

Monday, April 30, 2012
By Phani Sekhar

Phani Sekhar is Fund Manager – PMS with Angel Broking

Public Sector Undertakings (PSU) have come a long way. The wheel has come a full circle when investor apathy lead to low single digit stock prices on marquee PSU giants such as SAIL, BHEL etc to investors now falling over each other to get  a piece of Coal India in the not so distant past. 

The frenzy to participate in the PSU story that climaxed with Coal India started sometime in 2005 on the cusp of the previous Bull Market in the run up to the eleventh five year plan (2007-12). Government of India made ambitious plans for the economy in sectors such as power, defence, telecom and infrastructure making PSUs an important element in achieving the growth calculus.

As many PSUs achieved considerable operational autonomy and performed well, investors cheered them by re-rating them in the markets. But what went wrong in the last two years that of the 14 IPOs and FPOs that the government offered to the public, 10 are under water? Volatile and uncertain market conditions are partly to blame especially when the government itself creates policy hurdles for many of them.

Knee jerk policy decisions with myopic objectives as in the case of cess on crude oil to total dithering in taking painful long term decisions as in the case of the power supply chain from coal to state power utilities ( although power utilities come under states, the centre could have done more to discipline them much earlier) has taken the sheen off the infrastructure sector in which all these 14 issues came (except SCI) which further lead to the collapse of the multiples being accorded to that sector. Off the remaining 4 issues that have broken even or made the investors richer, PFC and REC are pale shadows of themselves while Power Grid’s execution canvass has whittled down considerably.

The best from the government stable, Coal India makes news everyday albeit for the wrong reasons. In this context, it is futile to debate the mode of issuing paper when the underlying asset is riddled with significant risks at least in the near term.

Investors must realize that it is not easy for any government to cede control of these Navratna and Maharatna companies so easily. The consequences of government control will be more readily evident in sectors where competition is challenging the PSU incumbent such as BHEL. It has played out in the past too with yesteryear crown jewels like BSNL, MTNL, and Air India lying by the way side due to lack of operation autonomy to deal with challenges of competition. However in sectors such as coal, minerals, transmission grids and oil and gas, where PSUs will be monopolies for the foreseeable future, investors can expect to reap rich rewards. PSU banking is also very attractive despite strong competition because the RBI has proven that if a financial system is bound hand and foot, it does not have enough rope to hang itself.

Corporate governance in the PSUs was always the proverbial elephant in the room.  Governance whispers in good times have turned into loud howls from angry investors demanding accountability from the PSU boards. While no investor expects laissez faire from PSUs, the applecart of relative autonomy has been upset by a hapless government in order to achieve motley objectives (with growth being one of them). 

As the government looks to garner Rs 30000 Crore by PSU divestment to fill a gap in its finances, it has to realize that governance concerns are real and a mere tokenism is not sufficient to assuage the sentiments of investors who have been smarting from the recent excesses.

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