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Good companies, bad governance

While PSUs can give good returns, excessive govt interference makes them unattractive

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A stock has to fulfil various criteria before fund managers deem it investment worthy. One of them is the manner in which are treated. As we follow the principle of “One share One vote”, very often, the majority shareholder (usually, the promoter group) has a distinct advantage. This could be misused to pass resolutions which benefit them and be against the interests of the minority.

Even if the intentions are not fraudulent, often the majority shareholder is privy to certain information regarding the company, which minority shareholders may be unaware of. This knowledge could again be utilised for personal gains.

However, in India there is one category where the majority shareholder takes decisions which harm both, themselves and minority shareholders. I am referring to Public Sector Companies (PSUs), where the Government of India is the majority shareholder.

Here are a few examples of behaviour which have the potential to destroy (or have actually destroyed) the intrinsic value of the company and in turn, the interests of the majority shareholder:

Oil marketing companies
They have consistently been prevented from pricing their products (especially diesel and LPG) based on commercial considerations. This, in turn, has eroded their profitability, adversely impacted their working capital requirements and rendered them hostages to budgetary handouts in the form of ‘Oil Bonds’. The ostensible reason for such irrational pricing is to protect the middle class consumer from the vagaries of oil prices. While this ‘noble objective’ has been achieved to some extent, it has also resulted in proliferation of luxury vehicles (including SUVs), which operate on diesel and rich consumers piggybacking on the subsidy, when they could easily afford to pay the full price of a cylinder. Minority shareholders who were once enthused by the cheap valuations of these companies are now classifying them as a “Value Trap”. The majority shareholder, however, does not appear too concerned about such seeming trivialities.

Coal pricing
Recently, India’s leading coal miner, Coal India, was summarily told that they would have to fulfil their obligations to the power companies at any cost. This included importing coal and selling it at a loss, if need be. However, the same company has been prevented by the environment ministry from undertaking mining in certain blocks which have been allocated to them.

The directive to supply coal was in response to vociferous complaints by powerful captains of industry and meant to assuage their apprehensions. All shareholders in this company have borne the brunt of this development as evidenced by the erosion in the market capitalisation. In fact, minority shareholders have been quite upset with the developments and even threatened action.
 

REPORT CARD
  BSE price in Rs % change
6-Jul-11 30-Dec-11 6-Jul-12 YTD 1 year
BPCL 650.85 479.15 764.10 59.47 17.40
HPCL 399.80 251.70 344.15 36.73 -13.92
Coal India 391.90 300.85 351.40 16.80 -10.33
ONGC 273.20 256.95 278.64 8.44 1.99
Indian Oil Corp 336.50 253.75 269.45 6.19 -19.93
BSE PSU Index 8595.38 6364.89 7377.16 15.90 -14.17
Nifty 5625.45 4624.30 5316.95 14.98 -5.48
Sensex 18726.97 15454.92 17521.12 13.37 -6.44


Over the years, they have been compelled to operate under various constraints (such as compulsorily opening branches in unviable rural areas, participating in irrational rural ‘Loan Melas’ and consequent ‘Loan Write-Offs’) which have hampered their ability to compete effectively with their more nimble private sector counterparts. Many of the actions of the majority shareholder are aimed at pandering to rural vote-banks at the expense of the health of the PSU banks.The fact that many of these banks are still surviving and functioning despite periodic setbacks is a testimony to the dedication and prowess of their top brass. However, minority shareholders have had to accept the fact that these banks will always trade at a steep valuation discount in comparison to the private sector banks.

In all these cases, there is an inherent conflict of interest between the commercial side (as a shareholder) and the political / social side of the Government. In the battle between the two, the former has usually played second fiddle to the latter and hopes of any improvement have been consistently belied.

Today, despite reasonable valuations, there is a lot of apathy for these stocks. In fact, most have been reduced to merely being the delight of traders. Recently, there was an article stating that the courts are taking a dim view regarding cavalier decisions taken by listed and are demanding that the financial implications of these decisions be clearly outlined. While it would be commendable if such disclosures actually happened, the question remains as to whether this will serve as a deterrent or not.

Investors who invest in such companies should do so with a clear idea that the landscape may not improve dramatically in the foreseeable future. If it does, it will be a bonus.


The writer is a certified financial planner

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