Nature of PSU's

[vasa1]

Nice essay on PSU's and what to expect (but not much new) here.

You are a minority shareholder in a business whose majority shareholder has completely different motives than yours.

Don’t pay too much attention to conventional business metrics. Instead, focus on what makes a particular PSU a privileged player and how long will those privileges last.

[Alchemist]

A main goal of a "business" is to maximise profits in the long-term.

A PSU has to balance its profit goals with social responsibility (and sometimes political interests of governments).

all investment/equity valuation models that we have, are based on the assumption that a business tries to maximise profits in the long-term; social responsibility/vested interest of promoters aren't considered.

and thus to value a PSU, we sometimes have to think differently.

===========================

the article talks about privileges, but in my opinion, PSU valuations are more about restrictions imposed by government and less about privileges given by the government.

at the time of Power Grid IPO, many analysts were extremely bullish on it as they considered it a monopoly play.

however, a company that isn't allowed to exploit its monopoly position and has profit limitations imposed by regulations, is as good as a commodity company.

===========================

I am not against PSU companies.

PSU companies serve not just the government and its employees, but the nation too.

besides creating employment opportunities for the masses,

-PSU's keep markets under control by supplying reasonably priced products.
-PSU's take extra risks by entering businesses that private companies are avoiding.
-PSU's take services and products to all parts of the countries, even those which aren't profitable.

To give an example, I don't use BSNL's mobile services. I feel the private players offer superior services.

However, I am very glad that BSNL provides mobile telephony at low costs.

It helps to keep down rates of private mobile companies.....

[vasa1]

No arguing with the point that PSU's play a vital role. By their presence, they reduce the chances of price-gouging by the private sector. The servicing of rural and non-profitable areas of the country is also undertaken by PSU's.

I think the point the article was making was that we should remind ourselves of these things and not expect performance (in the share bazaar) equivalent to a private sector company since quite often the Government's diktat doesn't go down well with the market (or with the company).

Case in point:
ONGC against parking funds with PSBs
Press Trust Of India / New Delhi September 28, 2009, 0:36 IST
Source

Oil and Natural Gas Corp (ONGC) has protested against the finance ministry’s directive of parking surplus funds with only the PSU banks, saying that the state-run banks, on getting assured business, act in a cartel and start offering interest rates lower then even retail deposits.

ONGC, which has a cash surplus of about Rs 18,000 crore, is losing Rs 200-300 crore in interest revenues annually, after it was forced to discontinue the practice of calling competitive rates for parking its cash.

[vasa1]

There is something somewhere on the site about how the proceeds of PSU disinvestment are to be used but I can't remember where ...

so here goes:

1:28 PM - On PSU disinvestment: 10% of equity for all PSUs must be held by the public and disinvestment proceeds will be used for capital expenditure on social sector programmes identified by the Planning Commission, says Home Minister P Chidambaram on NDTV Profit. The disinvestment proceeds normally go to the NIF (National Investment Fund) which has a corpus of Rs 2000 crore, he says. But due to the tight fiscal deficit situation, for a period of 2009-2012 these disinvestment funds will directly be used for social sector programmes, he adds. »

[vasa1]

We're like that only!

Looks like disinvestment has hit an "internal roadblock" in that a number of PSU's don't meet a SEBI requirement of independent directors.

PSUs fail to meet Sebi criterion on directors

So those who want to go "long" on disinvestment are better off consulting the list given above and adding this criterion to their due diligence.

[vasa1]

PSU stocks rally on sell-off buzz

“One reason why these shares are rising is obviously the positive sentiment,” ...

“Secondly, it opens the door for institutional investors, many of whom will consider investing only if the free float is above a certain limit.”

There are some analysts who don’t buy into the reform/free float story and believe that it’s the buzz created by merchant bankers that is driving up the stock prices.

“When has increasing supply ever increased share price?” questioned a fund manager

He said that this (is) part of the usual buzz that happens in the market before a share sale..

[Alchemist]

Originally Posted by vasa1

PSU stocks rally on sell-off buzz

If the rest of the market can go into the overvalued zone, there is no reason why PSU stocks shouldn't.

In bull markets, people come up with all sorts of reasons why stocks are rising and in bear markets, people come up with all sorts of reasons why stocks are falling.

I don't see any reason why the PSU stocks should rise 25%-30% just because the government wants to reduce its stake.

The government can be greedy while selling shares.

We have already seen it happen in case of NHPC, where the government left nothing on the table for investors.

The bonus/split announced for Engineers India is another attempt to maximize the stock price before the FPO.

Investors shouldn't fall for such gimmicks.

[vasa1]

Tulsian's views on NMDC and MMTC:

See drastic reduction in NMDC ahead of FPO: Tulsian

He feels that there will be a sharp fall in the price of these shares before the FPO because institutional investors won't buy at the current prices which he feels are grossly inflated.

Of course, SBI and LIC are the exceptions but how many FPO's can they prop up?

[Alchemist]

Originally Posted by vasa1

Tulsian's views on NMDC and MMTC:

See drastic reduction in NMDC ahead of FPO: Tulsian

He feels that there will be a sharp fall in the price of these shares before the FPO because institutional investors won't buy at the current prices which he feels are grossly inflated.

Of course, SBI and LIC are the exceptions but how many FPO's can they prop up?

NMDC has a market cap of 179443 crore and MMTC has a market cap of 169000 crore.

If government decides to sell 10% in each of them, even LIC and SBI won't be able to support the prices.

In my opinion, the floor price of both these stocks would be set much much lower than the current market price.

[vasa1]

Udayan's views on the road ahead ....

But the speech-to-text makes it a bit more difficult to understand!

[vasa1]

More scathing comments on PSU's, governance, yes men, etc.

When unions talk sense and the government doesn't

R Jagannathan

One event was the death of Subir Raha, former chairman of Oil and Natural Gas Corporation (ONGC), India’s premier oil producer. Raha was the last public sector manager with the gumption to stand up to babudom and fight for autonomy. He fought the minister, he fought the bureaucrats, and as long as he was there, ONGC had a fighting chance of retaining its operational autonomy. His untimely death earlier this month — he was just 62 — should give all public sector managers reason to examine their own powerlessness and what they should be doing about it

Raha was removed a few years ago I think for not seeing eye to eye with the then Petroleum Minister M.S. Aiyar.

[vasa1]

PSU IPO's aren't getting the welcome the government expected! Relatively unknown companies seem to be getting a better response. So the appetite is there.

Is it the size or the price or the marketing? Link

I'm getting worried about my dear Engineers India ...

[vasa1]

Today's ET carries a front page story on "Govt looks to institutions to bail out PSU share sales".

Although the article quotes anonymous sources, it is a sign of the difficulty in unloading massive amounts of shares.

The worrying aspect is that "large institutional investors" will be involved. Will there be some not-so-subtle arm-twisting? Won't this affect the profitability of these investors, probably PSU's, down the road?

[Alchemist]

Originally Posted by vasa1

Won't this affect the profitability of these investors, probably PSU's, down the road?

How will it effect the profitability of PSUs?

It will be similar to a QIP.

As far as I understand, government companies won't put their own money in these issues.

LIC, PSU-run mutual funds etc may bid, but then they don't invest their own money. Thus, their profitability won't be affected.

[vasa1]

Don't companies, excluding mutual funds and insurance companies, also have investments in shares?

What if they are asked to buy stock of a company being "disinvested" at a price they normally wouldn't think of?

[Alchemist]

Originally Posted by vasa1

Don't companies, excluding mutual funds and insurance companies, also have investments in shares?

What if they are asked to buy stock of a company being "disinvested" at a price they normally wouldn't think of?

PSU companies do invest in shares of other companies, but most of them don't have much "free cash".

By free cash, I mean cash that isn't need for future expansions.

As most of the bigger PSUs have lot of expansion plans. the managements are unlikely to agree for such investments.

When IOC had taken over IBP in 2002, the government's disinvestment process had been criticized because many felt that a PSU buying shares from government wasn't really "disinvestment".

If PSUs again start buying shares from the government, the government may face similar criticism.

As of now, LIC is the only PSU that is carrying a lot of free cash. If the government fails to set realistic goals for its disinvestment program, LIC may end-up buying most of the shares.

[vasa1]

I just checked the dividend payouts of BPCL, HPCL, and IOC. While the quantum has varied, they have paid dividend consistently.

[vasa1]

Originally Posted by vasa1

Today's ET carries a front page story on "Govt looks to institutions to bail out PSU share sales".

Although the article quotes anonymous sources, it is a sign of the difficulty in unloading massive amounts of shares.

The worrying aspect is that "large institutional investors" will be involved. Will there be some not-so-subtle arm-twisting? Won't this affect the profitability of these investors, probably PSU's, down the road?

Problem solved! PSUs need only 10% free-float.

If only all our problems could be solved by notification .

Only 15 state-run firms will have to comply with the new 10% norms as opposed to the earlier 35, according to a report by SMC Capitals. These include MMTC, Hindustan Copper, Neyveli Lignite, National Fertilsers and HMT.