Investors in government owned companies are the most optimistic of all investors. The reasons for the optimism stems from a) markets doing well and taking up the share prices of government owned companies in the process and b) government will deliver shareholder value for its own benefit. Unfortunately for investors the optimism is misplaced on both the counts. The reason for the misplaced optimism on government run companies is that the owner, which is the government of India is inherently socialistic and uses all its assets to fulfill its so called social responsibilities. Shareholders interests are secondary to the government and hence government owned companies will always come out second to better managed counterparts in the private sector in terms of creating shareholder wealth.
The BSE PSU index, which is an index of listed companies that have the government as the majority shareholder, has underperformed the BSE Sensex in the ten year period from 2002-2012. The PSU index returned 342% in the 2002-2012 period while the BSE Sensex gained 417% in the same period. (Table 1.) In one sense investor optimism on the market taking up PSU stocks is right but the fact is that investors could have gained more by just investing in the BSE Sensex, which is more diversified than the PSU index.
On the other hand in weak market conditions the PSU index underperforms the broad market in negative terms. The PSU index has lost 29% in the 2007-2012 period while the Sensex has lost 14% in the same period. (Table 1.). PSU stocks are not defensive in nature and falls more than the broad index when markets are weak.
The government is the biggest beneficiary if its companies work towards creating shareholder wealth. The value of the government’s investments in its companies go up and this enables the government to encash the value as and when it require money to fund its fiscal gap. The government unfortunately does not see it that way. The government believes that its companies are required to fulfill social responsibilities and also help the government in times of need. Minority shareholders do not figure in the government’s scheme of things except to buy out a part of its ownership as and when the government disinvests a small stake
ONGC is used for fuel subsidy while Coal India is used for power subsidy and these cash rich companies will continue to be used for government’s subsidy schemes. The fact that these companies are a monopoly and will continue to make oversize profits will not help shareholders, as the government will make them distribute the profits for social benefits rather than shareholder benefits.
The government has the capability of suppressing its own companies from growing and helping the private sector competitors in the process. The state of the Oil Marketing Companies such as IOC, BPCL and HPCL is a case in point where these companies have been on the back foot for over eight years as the government has consistently been lagging in subsidy payments to these companies. The result of lagged subsidy payments is that these perennially cash starved companies have been forced to abandon capital expansion plans and this has resulted in companies like Reliance and Essar Oil gaining market share.
The lack of focus on shareholders wealth is telling on companies where private sector participation has growth. The performance of companies like MTNL against its private sector counterparts shows the lack of competitive capabilities in these once large monopolies. Bharti Airtel has gained 2800% while MTNL has lost 67% in the 2002-2012 period. The stark difference in performance shows the complete indifference on the government’s part to its shareholders.
So why would you want to own PSU shares?
The recent activism by the UK based Children’s Investment Fund (TCI) against Coal India is more laughable than anything else. The government owns 90% of Coal India, which is a hugely cash rich company given its monopoly status. However the monopoly status is the only thing going for the company. Coal India signifies the socialist nature of the government, where coal prices are not passed on to end users and the government is forcing the company into supplying fuel at disadvantageous prices to power producers. The government believes that cheaper coal costs will help power companies produce power at cheaper prices and pass this on to consumers. The fact that power companies will use the cheap coal to increase margins does not figure in the governments plan but that is a separate analysis altogether. TCI is the last thing on the government’s mind when it dictates the affairs of Coal India.
TCI must have a very solid reason to stay invested in Coal India. Similarly other investors must also have a solid reason to stay invested in PSU shares and the reason cannot be the ones stated at the beginning of this analysis. Investors should truly believe that PSU stocks will outperform the broad market and its private sector counterparts to stay invested. The past performance does not suggest good gains and the current government’s stance on PSU companies do not instill confidence. If there is some other good reason to stay invested in PSU stocks we all would like to know the reason.