There has been a fair amount of excitement about public sector stocks in recent weeks, with a reasonably high-profile IPO in NHPC, and more like Oil India in the pipeline. There are also at least two PSU-focussed mutual funds in the pipeline — from Religare and SBI. Naturally, there has been analyses of these companies’ business, financials and their future prospects.
However, what is generally missing in these analyses is an explicit discussion of a soft factor — for want of a better word, call it their ‘PSUness’. This could well be the most important factor in these companies’ future.
As the Finance Minister has made it amply clear, PSUs will remain PSUs, whether they occupy the commanding heights of the economy or wallow in its despairing depths. Many years ago, there was this radical idea that the government made a poor businessman and it should get out of running companies. That concept has now been formally abandoned. The government’s stake in these companies will not fall below 51 per cent. Its main interest is to help its budget along by selling some stake when the markets are hot — no different from any promoter trying to encash some value because he needs the money for something else.
For the investor, this means the most crucial thing about PSUs will not change any time soon. It may sound too vague to evaluate, but these are not ‘driven’ organisations. Only people who have interacted with both the private and public sectors can understand this difference.
In the public sector, there just isn’t the urge to do better. When business is bad, there just isn’t the same kind of desperation to somehow protect and increase profits — and indirectly enhance shareholder wealth. And you can’t really blame those who are running these companies, when the majority shareholder’s own priorities don’t lie in increasing the value of its holdings.
And that 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. Nothing can change that, at least nothing that is currently on the horizon.
All things said and done, for those planning to invest in these stocks, this carries a clear message. Don’t pay too much attention to conventional business metrics. Instead, focus on what makes a particular PSU a privileged player and how long those privileges might last.