Govt companies are not good for investor health

By Arjun Parthasarathy

The BSE Public Sector Undertakings (PSU) index has lost 6.7 percent year-on-year while the BSE Sensex has gained 9.5 percent over the same period. The PSU index has underperformed the Sensex by 16 percent over the past one year. Investors placing their faith in government-owned companies have been really hit hard.

The government, not surprisingly, has hit investors the same way they hit honest taxpayers - i.e. hard. Investors hopefully have woken up to the fact that the government cares about itself and nobody else and will henceforth give government-owned companies much lower pricing to safeguard their interests.

[caption id=“attachment_14513” align=“alignleft” width=“380” caption=“Investors are not keen to put in their money in public firm stocks. Reuters “]  [/caption]

The government runs PSUs and the persons at the top of PSU entities, however good they may be, have to bow to the majority owner, which is the government. If the majority owner does not care about shareholder value, the management cannot do much to help investors. PSUs have many things going for them. Government support gives them access to cheaper funds, monopoly status in many cases, and size. However, they have many factors going against them. Ownership by the government, inflexible labour laws and lack of entrepreneurship at the top are some of them. The tradeoff between for and against weighs heavily on the negative side, especially if investors have not been watching the price-earnings multiple.

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The increase in subsidy borne by upstream oil companies to enable the government to keep down fuel prices is just one example of the government’s attitude to its companies. Oil refiners have not been allowed to grow for almost a decade now due the subsidy policies of the government. Reliance and other private refiners have benefited from this. Indian Oil, BPCL and HPCL have consistently been paid for their losses through the issue of oil bonds or cash payments, but they have been unable to raise capital expenditure (capex), given the lagged payments for their losses.

The government has made PSU banks the least efficient in the banking space. Banking requires talent and talent needs to be paid, and PSU banks cannot attract talent as they do not pay market rates due to government pay policies. As a result, the ratio of price-to-book value for public sector banks is in the range of one or two while that for private sector banks is in the two to three times.

The government forces PSUs to pay large dividends even if capex requirements are high. The government requires the dividends as it is a net borrower in the market due to its large fiscal deficit (fiscal deficit as percentage of GDP was at 5.1 percent for 2010-11). Healthy, profit-making PSUs can afford to pay large dividends but not the ones that are in a growth phase or just coming into profits. Managements pay out larger dividends to gain favour from the government even if it is against shareholders interests.

Fortunately, after the 1990s crises, where companies such as IDBI, UTI and SAIL had to be bailed out, the government is wary of too much interference in the management of the companies. However this does not give solace to investors who have lost out due to the larger policies that affected PSUs. Investors must have an innate wariness of government policies if they want to stay invested in PSUs.