Watch out: Any firm blaming policy paralysis for its woes is a Sell

The most abused term in the current economic environment is “policy paralysis”. Widely used by corporates to give a reason for their below par results, the term has become an excuse for non-performance.

Corporates that depend on government policies for their profits are the heaviest users of the word policy paralysis.

Policy paralysis refers to government inaction: lack of policy reforms to cut subsidies and lack of enabling policies for improving the country’s infrastructure are just a few.

[caption id=“attachment_387763” align=“alignleft” width=“380”]  Stay away for stocks that depend on favourable government policies for profits. Reuters[/caption]

The common man encounters effects of this in his day-to-day life. The pathetic condition of roads and other infrastructure, the rampant grass root level corruption and inflation are some of the effects of policy paralysis that he experiences. As he goes about his life, he may complain but does not let it affect his bearing on everyday activities.

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The fact that many well established corporates are shouting from the rooftop about policy paralysis makes one wonder how dependent they are on the government for their well being.

On the one hand, corporates want least government interference in running their affairs or in running of capital markets in the country, but on the other, they want the government to intervene to overcome a difficult situation.

Corporates alleging policy paralysis for their ills are effectively telling their shareholders that they make money because of government policies, not in spite of government policies.

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Hence for a delay in construction of a road or a power project, they blame land acquisition issues.

The question is what the corporates and its shareholders thought when they made a bid for such projects at absurdly low prices?

Airport projects that are bleeding (Delhi Airport of GMR Infrastructure), power projects that are not feasible (DNA reports that cost revision of Mundra ultra mega power project will result in a Rs 2.27 lakh crore burden for the consumer) and high bidding price for 3G auctions are all examples of corporates going overboard. Needless to say, the markets have beaten down these stocks to an extent where they cannot use their equity for their survival. Stocks of GMR, Tata Power, Adani Power and Reliance Communication have declined 65-90 percent from their life-highs due to their aggressive bidding for projects and licences.

True, policy paralysis is a cause for many ills of the country at present. The widening of fiscal and current account deficits, and weakening of the rupee and capital markets are all due to policy paralysis.

However, corporates, especially from the private sector, cannot blame policy paralysis for the ills.

Think of Kingfisher Airlines blaming policy paralysis for its bankruptcy! The reason for debt holder and shareholder losses is mismanagement.

Lenders and equity investors are to be equally blamed for losing money by lending or investing in companies that were affected by the so-called policy paralysis.

There is no excuse for not doing enough due diligence on the pricing of road, airport, power and telecom projects and licences.

No one should sympathise with lenders and shareholders losing money to policy paralysis.

The message to the investor is loud and clear. Stay away for stocks that depend on favourable government policies for profits. Any company blaming policy paralysis for its woes is a sell.