This article is the cover story in the October 2009 issue of Wealth Insight magazine that seeks to unveil the opportunities that can arise from a more liberal disinvestment government agenda, which will open various investing opportunties for investors in the near term. We showcase the article in the light of the Prime Minister Manmohan Singh underlining the crucial need of doing so on October 15. He said: "The government is encouraging the listing of public sector enterprises as this unlocks the value of a company, improves its corporate governance standards and also helps it in raising resources for funding future expansion plans."
We unveil here the 10 best investment options in the PSUs space, one per day.
Indians are once again being swamped by the talk that dominated the first 50 years of our country’s existence. The words being mouthed are public sector undertakings (PSUs). The difference is that the conversation has shifted from the political world to the world of investors, and yes, from erstwhile negative connotations to profitable ones.
While back in those days we had politicians ordering us to accept it as a fact that PSUs are good for everybody’s well-being, today, it is the stock market trader, private analyst, and the media that are saying wealth is waiting to be unleashed on the smart Indian investor, once the current political power centre signs on the dotted disinvestment line.
What disinvestment refers to is the dilution of government stake in PSUs, in favour of the public that would bring new PSUs to list on stock markets, or already-listed ones will see further stake sales.
While shareholders are expected to benefit from the unlocking of value of the PSUs, the PSUs themselves will benefit from the greater adoptability of private management practices. Most of all the very fact that a PSU is listed increases its transparency and accountability quotient, making it responsible to shareholders and to the market regulator.
The situation prevalent in the last century has almost no bearing on the current one (from that of welfare maximization to profit maximization). Nevertheless, from an imperfect past, PSUs have traversed the entire gamut of performances to stand today at the forefront of the creation of a new and modern India, again. Here then, is the new PSU story:
POSITIVE POLITICAL PULL
With a patchy record on disinvestment in its first 5 years in power, the UPA government is looking to underline its importance as a liberalizing force.
Just days before Budget 2009 was presented, it was announced that the state must raise a sum of ‘at least’ Rs 25,000 crore each year by selling between 5-to-10 per cent of its share in PSUs. But good government intentions mostly get derailed and actual receipts from targeted amounts have always fallen short.
PRESSURE POINTS
There are a number of immediate and long-term factors that have predisposed the government towards disinvestment:
Money-Making Opportunity: Disinvestment call can no longer be ignored by the government. Most immediately, under the current economic situation, divestment will help India relieve the fiscal deficit pressure.
Market Pressure: Another compulsion for disinvestment is coming from the Securities and Exchange Board of India (SEBI) — it wants new norms in place that stipulate a minimum of 25 per cent of a company’s shareholding to be present in the public realm. Its intent is to enable a systemic transformation that will address the problem of the shallow nature of Indian stock markets. PSUs disinvestment can provide the depth and width to the capital markets, leading to lesser speculation and volatility.
Raising Reach: There is an increasing amount of frustration in the Indian households, where there are a limited number of money-making investment vehicles available. The percentage of Indian household savings currently invested in the capital markets adds up to just 5 per cent. India’s household savings have risen to above 37 per cent, and the divestment agenda will get these fallow funds into the productive zone.
PSU POWER-PLAY
PSUs boast of some very strong fundamentals. They were intentionally intended to do so as they had a mandate to achieve the commanding heights of the economy. Check out the big numbers:
Generating Growth: In 1997-98, central public sector enterprises (CPSEs), whose records are best tracked, generated a net profit of Rs 15,000 crore. By 2007-08, the same had charged up to Rs 80,000 crore. Over the last 10 years, the net profit generated has grown at a CAGR of 19.37 per cent.
Even in 2008, the 18 Navratnas performed quite well, with the average total income growing (YoY) by 13 per cent to Rs 6,871,624.97 million, which translated into a net profit of Rs 614,750.86 million (net profit grew by 9% YoY).
Sustaining Size: The top 18 PSUs have an income that tots up to a mammoth 15 per cent of India’s gross domestic product (GDP). Out of top 10 companies in India, 6 are PSUs. They stack up powerfully on the bourses too, where one out five companies in the Nifty 50 are PSUs. PSUs serve shareholders well too, paying over 33.5 per cent of their net profits as dividends.
Garnering Gains: The numbers involved from a disinvestment exercise will be huge. For instance, the market value of 55 listed PSUs is $311 billion. The government holds an average of 80 per cent stake in them and as such its share is over $250 billion. According to a Morgan Stanley report, the government can pocket as much as $163 billion if it dilutes its stake by 51 per cent (both listed and unlisted PSUs).
OUTPERFORMERS
Investors must scrutinize exactly how a disinvestment drive in a particular company may affect its overall performance. While there is no separate road-map to gauge the amount of profits that a divested PSU may deliver, applying some orthodox, and other, methods can throw up a fair idea.
Here are a few suggestions:
Monopoly Power: To start off, the biggest indicator to a PSU performance is that, in an age of democracy, they are monopolies. Aside from the command and control capabilities, their strength in powering overall economic growth is also comprehensive. These PSUs were dreamed up during the Socialist proclivities of the newly-independent Indian rulers. The result was that PSUs got to span areas or sectors that today form the core of the India growth story. It is a well-known fact that the government always gives precedence to a PSU while allocating projects. Such patronage could prove crucial in driving valuations. It would pay therefore, to identify the movers and shakers in this space.
Changing of Guard: After the divestment process, will the management remain within the public sector or will there be a passing on of control to private hands? If the government is divesting a small stake, all it is going to do is increase the floating stock in an already listed company, while it will do nothing to improve its working ethos.
In case of a passing of control to private management, the agreement should be scrutinized for clauses banning retrenchment of surplus manpower. A free hand for the new management is imperative to change the outlook of the company in the markets.
Investors must also check whether a new policy-change era lies around the corner. Free market competitiveness is not really a strength PSUs are known for; just look at BSNL vis a vis Airtel, Vodafone and others.
Diversified in Detail: The government’s share of the core sectors’ pie translates into a 17 per cent control over the oil sector, 16 per cent in power, 16 per cent in banks, 10 per cent in minerals & mining, 10 per cent in trading, 8 per cent in industrial capital goods, 8 per cent in petroleum products and 5 per cent in ferrous metals. This indicates the wide range of activities that PSUs are carrying out and that spells good for the kind of diversification that no corporate can boast of.
Productivity Enhancer: A routine research effort will unveil whether the PSU bound for divestment is a technologically superior corporate. If it is running on obsolete technology/ machinery then the chances of it improving its valuation gets reduced considerably. But there still are some PSUs where a little bit of change in technology, work systems, marketing etc., will go a long way in increasing value and that must be looked out for.
Product Profile: Exactly what kind of products the PSU is using/creating is also crucial to the unlocking of value. If the PSU is a raw material supplier, its fortunes will depend on how well the buyer of the commodity is doing.
Incentive to Advance: Perform- ance-linked incentives that have been introduced in the public sector are value-creators too. Incentives apart, the public sector pay packets can now be said to rival their private sector counterparts to a large degree and that should go a long way in raising performances.
We unearth here the best investment opportunities in PSUs space. We will showcase 10 PSU Gems over the next few days:
1. Bharat Electronics Limited (BEL)
2. Bank of India
3. Bharat Heavy Electricals Ltd. (BHEL)
4. Balmer Lawrie & Co.
5. Indraprastha Gas
We unveil here the 10 best investment options in the PSUs space, one per day.
Indians are once again being swamped by the talk that dominated the first 50 years of our country’s existence. The words being mouthed are public sector undertakings (PSUs). The difference is that the conversation has shifted from the political world to the world of investors, and yes, from erstwhile negative connotations to profitable ones.
While back in those days we had politicians ordering us to accept it as a fact that PSUs are good for everybody’s well-being, today, it is the stock market trader, private analyst, and the media that are saying wealth is waiting to be unleashed on the smart Indian investor, once the current political power centre signs on the dotted disinvestment line.
What disinvestment refers to is the dilution of government stake in PSUs, in favour of the public that would bring new PSUs to list on stock markets, or already-listed ones will see further stake sales.
While shareholders are expected to benefit from the unlocking of value of the PSUs, the PSUs themselves will benefit from the greater adoptability of private management practices. Most of all the very fact that a PSU is listed increases its transparency and accountability quotient, making it responsible to shareholders and to the market regulator.
The situation prevalent in the last century has almost no bearing on the current one (from that of welfare maximization to profit maximization). Nevertheless, from an imperfect past, PSUs have traversed the entire gamut of performances to stand today at the forefront of the creation of a new and modern India, again. Here then, is the new PSU story:
POSITIVE POLITICAL PULL
With a patchy record on disinvestment in its first 5 years in power, the UPA government is looking to underline its importance as a liberalizing force.
Just days before Budget 2009 was presented, it was announced that the state must raise a sum of ‘at least’ Rs 25,000 crore each year by selling between 5-to-10 per cent of its share in PSUs. But good government intentions mostly get derailed and actual receipts from targeted amounts have always fallen short.
PRESSURE POINTS
There are a number of immediate and long-term factors that have predisposed the government towards disinvestment:
Money-Making Opportunity: Disinvestment call can no longer be ignored by the government. Most immediately, under the current economic situation, divestment will help India relieve the fiscal deficit pressure.
Market Pressure: Another compulsion for disinvestment is coming from the Securities and Exchange Board of India (SEBI) — it wants new norms in place that stipulate a minimum of 25 per cent of a company’s shareholding to be present in the public realm. Its intent is to enable a systemic transformation that will address the problem of the shallow nature of Indian stock markets. PSUs disinvestment can provide the depth and width to the capital markets, leading to lesser speculation and volatility.
Raising Reach: There is an increasing amount of frustration in the Indian households, where there are a limited number of money-making investment vehicles available. The percentage of Indian household savings currently invested in the capital markets adds up to just 5 per cent. India’s household savings have risen to above 37 per cent, and the divestment agenda will get these fallow funds into the productive zone.
PSU POWER-PLAY
PSUs boast of some very strong fundamentals. They were intentionally intended to do so as they had a mandate to achieve the commanding heights of the economy. Check out the big numbers:
Generating Growth: In 1997-98, central public sector enterprises (CPSEs), whose records are best tracked, generated a net profit of Rs 15,000 crore. By 2007-08, the same had charged up to Rs 80,000 crore. Over the last 10 years, the net profit generated has grown at a CAGR of 19.37 per cent.
Even in 2008, the 18 Navratnas performed quite well, with the average total income growing (YoY) by 13 per cent to Rs 6,871,624.97 million, which translated into a net profit of Rs 614,750.86 million (net profit grew by 9% YoY).
Sustaining Size: The top 18 PSUs have an income that tots up to a mammoth 15 per cent of India’s gross domestic product (GDP). Out of top 10 companies in India, 6 are PSUs. They stack up powerfully on the bourses too, where one out five companies in the Nifty 50 are PSUs. PSUs serve shareholders well too, paying over 33.5 per cent of their net profits as dividends.
Garnering Gains: The numbers involved from a disinvestment exercise will be huge. For instance, the market value of 55 listed PSUs is $311 billion. The government holds an average of 80 per cent stake in them and as such its share is over $250 billion. According to a Morgan Stanley report, the government can pocket as much as $163 billion if it dilutes its stake by 51 per cent (both listed and unlisted PSUs).
OUTPERFORMERS
Investors must scrutinize exactly how a disinvestment drive in a particular company may affect its overall performance. While there is no separate road-map to gauge the amount of profits that a divested PSU may deliver, applying some orthodox, and other, methods can throw up a fair idea.
Here are a few suggestions:
Monopoly Power: To start off, the biggest indicator to a PSU performance is that, in an age of democracy, they are monopolies. Aside from the command and control capabilities, their strength in powering overall economic growth is also comprehensive. These PSUs were dreamed up during the Socialist proclivities of the newly-independent Indian rulers. The result was that PSUs got to span areas or sectors that today form the core of the India growth story. It is a well-known fact that the government always gives precedence to a PSU while allocating projects. Such patronage could prove crucial in driving valuations. It would pay therefore, to identify the movers and shakers in this space.
Changing of Guard: After the divestment process, will the management remain within the public sector or will there be a passing on of control to private hands? If the government is divesting a small stake, all it is going to do is increase the floating stock in an already listed company, while it will do nothing to improve its working ethos.
In case of a passing of control to private management, the agreement should be scrutinized for clauses banning retrenchment of surplus manpower. A free hand for the new management is imperative to change the outlook of the company in the markets.
Investors must also check whether a new policy-change era lies around the corner. Free market competitiveness is not really a strength PSUs are known for; just look at BSNL vis a vis Airtel, Vodafone and others.
Diversified in Detail: The government’s share of the core sectors’ pie translates into a 17 per cent control over the oil sector, 16 per cent in power, 16 per cent in banks, 10 per cent in minerals & mining, 10 per cent in trading, 8 per cent in industrial capital goods, 8 per cent in petroleum products and 5 per cent in ferrous metals. This indicates the wide range of activities that PSUs are carrying out and that spells good for the kind of diversification that no corporate can boast of.
Productivity Enhancer: A routine research effort will unveil whether the PSU bound for divestment is a technologically superior corporate. If it is running on obsolete technology/ machinery then the chances of it improving its valuation gets reduced considerably. But there still are some PSUs where a little bit of change in technology, work systems, marketing etc., will go a long way in increasing value and that must be looked out for.
Product Profile: Exactly what kind of products the PSU is using/creating is also crucial to the unlocking of value. If the PSU is a raw material supplier, its fortunes will depend on how well the buyer of the commodity is doing.
Incentive to Advance: Perform- ance-linked incentives that have been introduced in the public sector are value-creators too. Incentives apart, the public sector pay packets can now be said to rival their private sector counterparts to a large degree and that should go a long way in raising performances.
We unearth here the best investment opportunities in PSUs space. We will showcase 10 PSU Gems over the next few days:
1. Bharat Electronics Limited (BEL)
2. Bank of India
3. Bharat Heavy Electricals Ltd. (BHEL)
4. Balmer Lawrie & Co.
5. Indraprastha Gas
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