PSU divestment: Don't bet on it...

Nov 7, 2009

In this issue:
» India needs to step up on education spending
» US unemployment soars to 10%
» Not to fear the recent correction, says Mark Mobius
» Gold hits a new record
» ...and more!

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Disinvestment in India is finally seeing some light of day. As reported on Bloomberg, India's cabinet yesterday approved a plan requiring all state-run companies to make sure that 10% of shares are publicly traded. The proceeds from these stake sales would be used for spending on the government's social programmes which require topmost priority, namely reducing unemployment and building infrastructure such as roads, ports and utilities. Not just, such a move would also enable the government to reduce its dependence on borrowings.

In fact, this seems the best time for the UPA government to actually make significant headway in this regard (disinvestment) since it no longer has to contend with the Left obstructing its path. So, keeping in mind all these factors, was the rally in PSU stocks (up 4.7% during the week) justified or has there been too much hype?

While we believe that the government's intentions are in the right direction, execution as usual has been a serious issue. Various plans of government stake sales in the past had hit a stone wall. Therefore one will have to wait and watch to see whether this plan is actually put into action.

 Chart of the day
India's spending on education leaves a lot to be desired. At least when it comes to a comparison with its developed and developing peers, India has some way to go in this regard, as is depicted in today's chart of the day. India's spending on education as a percentage of government expenditure stands at 10.7% as against 14.5% and 12.9% for Brazil and Russia respectively.

Being surrounded by politically unstable nations means that India has to keep aside a huge chunk of revenues for defence. Populism and fear of losing vote banks has made Indian governments reluctant to do away with subsidies. Then there are salaries of government employees and interest expenses to take care of. That does not leave much for spending on social sectors such as education, healthcare and infrastructure all of which is critical for any nation's long term growth.

Data Source: United Nations Human Development Index

The man who was bullish on Indian markets when few others were at the end of last year - Mark Mobius - now believes that there are no real reasons to fear the recent correction. According to an interview he gave to a leading business channel, Mobius has said that this is just a 'usual' correction and investor should not be alarmed by it.

Mobius has however indicated that he wouldn't be surprised to see a 20% correction in stock prices. As he has said, "That is not something we should be alarmed about. We are definitely in a secular bull market as long as the money supply continues to grow."

Mobius has also said that he is optimistic on the emerging market category in general and believes that stocks here may reach their all-time highs going forward because of an increase in projected earnings. His advice? "It is important for people to be invested and not to hold too much cash at this stage of the game." We could not agree with him more.

Steve Jobs, the renowned CEO of Apple and the man credited for the iPod and iPhone has been named as 'CEO of the decade' by Fortune magazine. According to the publication, he was deserving of the title because he has "radically and lucratively reordered three markets - music, movies and mobile telephones - and his impact on his original industry, computing, has only grown. Remaking any one business is a career-defining achievement; four is unheard-of."

We wonder if Indian CEOs can take a leaf out of Jobs' track record of innovation in these dynamic industries and apply the same for the success of their own organisati0ns and industries. 'Low-cost' cannot serve as our competitive advantage for long!

Slight recovery there may be, but the US seems to have a lot going wrong for it right now. Take the latest economic data released with respect to jobs. As reported on Bloomberg, the unemployment rate in the US jumped to 10.2% in October, the highest level since 1983. This casts a pall of gloom over the prospects for a sustained recovery in the world's biggest economy.

Once the global financial crisis broke out, the US government injected massive doses of liquidity in the form of stimulus measures to perk up the economy. The idea was to let the Americans go back to doing what they did best before the crisis erupted: spending. But that has not really worked. Already there are concerns that the recovery in the US is wholly dependent on the stimulus measures and that once these are removed, the economy will be hit hard again. And these stimulus measures have not done much in terms of creating jobs and reducing unemployment. What is more, a weak job market will only mean that the average American will be vary of spending freely thereby denting the very premise of the stimulus measures. The deficit, meanwhile, has ballooned. Thus, the Obama administration has a very challenging task on its hands and whether it will succeed in bringing back the US from the slump is anybody's guess.

Gold has not yet lost any of its sheen and the yellow metal continues to set new records. The precious metal soared to a new high of US$ 1,100 an ounce as investors fear that the government's low interest rate policy will undermine the dollar and lead to inflation. This is despite the fact that the Fed believes that inflation will be subdued for some time. The unenthusing jobs report has only increased the allure of the metal as the Fed will keep the interest rates low for some time which will weaken the dollar even more.

Everybody knows that the US' spending binge and the subsequent creation of asset bubbles sowed the seeds of the financial crisis that hit economies worldwide. Thus, it is hardly surprising when former Fed Chairman Paul Volcker highlighted that the consumer accounts for too much of the US economy.

Volcker says, "Consumer spending accounts for about 70% of GDP, a level has been reached only by 'the magic of financial engineering.' We cannot rebuild the economy to the tune of 70% consumption or housing booms. It will just break down again."

What Volcker proposes is more manufacturing and the need to increase exports and the idea is to translate the US' strength namely innovation into actual production. This would also imply a rise in the value of the dollar; something that may not augur well for exports and government's aim to bring entitlement costs down. But as a saying goes, one simply cannot have everything.

After witnessing a dreadful previous week, key markets worldwide staged a positive performance this week. India's benchmark index, BSE-Sensex, which fell by about 5.4%, last week, ended higher by about 1.6% this week. As for global markets, China led the pack of gainers (up 5.6%). This was on the back of speculation that the government will extend stimulus measures to strengthen the economic recovery. Following China were the Brazilian and US markets, recording gains of 4.7% and 3.2% respectively. France and the UK markets followed suit, ending the week higher by 2.8% and 1.9% respectively. Japan was the sole loser amongst the key markets, recording a weekly loss of 2.4%.

Source: Equitymaster, Yahoo Finance

 Weekend investing mantra
"If past history was all there was to the game, the richest people would be librarians." - Warren Buffett

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10 Responses to "PSU divestment: Don't bet on it..."

Anuj Sharma

Nov 11, 2009

Well, lets try to understand why this divestment issue has gain so much attention these days.

-- Various countries across the world had provided stimulus packages, which have failed to provide the desired results in terms of generating sustainable growth and self propelling wheel i.e lower rates*- increase in investments- increase in income- increase in consumption**- increase in investment.....

* lower rates regime can't stay more for long as it's adding to the already ballooned fiscal deficit.

** people in the western world are reluctant to spend in the way they used to, as they are skeptical about the future.

In case, the developed nations fail to handle the problem, countries across the globe may have to face days of severe hardship. And in that scenario it becomes imperative for India that it should go for divestment in PSU's and take advantage of the current environment when everybody is bullish about India's growth story and should redeem part of its shares at high P/E's (Valuations) and use the proceeds to reduce the fiscal deficit before it blows out of proportion.

-- No doubt that divestment talks have given a little push to the markets for a short term. But betting on it may not yield significant returns even in the long haul. As the divestment will only be to the tune of 10% and the same people (babus) will be on the driver's seat and it is very unlikely that there will be any U-turn (turnaround) in the future that'd boost up the stock prices.


Dilip Singh

Nov 8, 2009

Dear Sir

In my opinion, Indian economy is going in right direction. A very strong base of PSU s is required and at the same time very strong base of private sectors is also required. Lot of private sectors have moved oveseas. This is very good sign To day there is a need of very strong industrial base which India is having because of foresightedness of our previous leaders.Today even oil countries like UAE is going for industrialisation in a very big way.
Let us concentrate on the factors which is killing india. These are very important. People are doing non sense and are going caught free. Are we impotent.
factors responsible are
1.Judiciary--with delayed or no justice. This has byproducts like
--a).profession of lawyers is coming up depending upon only lies. This is not possible in UAE.
--b).Even police has gone to corrupt hands, because they also see that if they caught a culprit, he goes unpunished.
--c). Mafia and hired killings are going up , because nothing happens to them
People are saving themselves by their own effort or by luck.
--d).Hafta wasuli, rangdari is being demanded even upto 50 lakhs . I have seen this thing in paper. This was a case in Bihar.
2. Second biggest factor is--No. 2 market. India is most money generating country in region. But 90% of money is going black market or no.2 market.Duplicate products market is coming up. Even soft drinks, minral water etc you can stamped any brand you like.Duplicate medicines are another case. Ofcourse this must be supported by big people or leaders. Small people can not do it.
Money generated like this, a disproportionate income , can not be kept as white income as per income tax rule. This is a punishable crime. So this money goes out by any means like swiss bank etc. For this also you need not to put any special effort. Agents are roaming. You just put your signature and job will be done.
Mafias cases are very clear now. Builders & mafias are tied togather. You can book a flat but you can not get occupation.

3.No strict VISA rules. Any body can come inside India from outside from any border by just giving small money. So more than population growing inside, influx is from outside. To India people can come , because they can get some work, business and get ration cards and voting rights also in our election politics.
VISA rules has to be strict like other countries.
4.Political corruption. There is no code of conducts for politicians. Whosoever wins election , goes to parliament or assembly for five years. Uski to lottery lag gayee. Panch sal me kismat bana lega.
5. Because of no punishment for violation of law, whosoever breaks law is called smart. If somebody is following law , he is called lakir ka fakir, not smart.
6.All our oficials and police, administrators etcare corrupt. SAB KO NEECHE SE UPAR TAK UNKA PERCENTAGE JATA HAI.

India wants to become superpower without solving these, just impossible. Pls do not dream.Amritya Sen has clearly written that first basic benefits are to go to each man of public.
Like-- basic needs--1.Roti Kapada Makan
2. Education
3. Health
4. Job

Now 100 days rojgar guarantee yojana has started , very good we have to meake it for all for full time.
2. Fasal bima yojana, like insurances should come.
3. Old age pension, widow pension etc --pradhans are taking 500 to 1000 Rs to fill this form and to process.

India is having very good fleet of intelligent and hardworking fleet of engineers . A very good strength, let us use them and give then a chance to contribute of India. Second strength is a very good industrial base developed by India.
3. We have to encourage export based industries.

Let us join hands and make India superpower.


Dilip Singh



Nov 8, 2009

The politics of disinvestment in PSUs is an attempt to off-load the inefficiencies of dormant PSUs to the innocent retail investors at hectic premium price.



Nov 8, 2009

Excellent source of information for any one who is keen to know.Please keep it up.Especially the info on gold price movement provides alternative investing opputunities to investors. Similar info on other avenues will be a great service to investors.



Nov 8, 2009

it is really good divestment is happening in PSUs. it will free all PSUs from the control of IAS Babus. In a defence Industries like HAL after divestment board can take independent decision instead of seeking permission from some useless Babus


Sudheer Uppadhayay

Nov 7, 2009

As a new entrant to your site i am watching carefully the contents and suggestions made by your team.To my mind the PSU divestment is the idea of a sick mind who wants to make use of the typical fiscal situation and make money in future. The politics of divestment is not going to help the economy and it will be very difficult to retrace from the ugly situation.Sometimes it strikes me that the planners are trying to save the people who may be brought to books in the event some understanding is reached with the Swiss Authorities in connection with the black money. The case of one of the Chief Ministers supported endlessly by Congress party is in front of us. Rest when i think again.



Nov 7, 2009

I'm lucky cause I'm in touch of your valuable advises n informations about equity. Sir may I have the same for commodities please?
Looking forward for your kind reply, meanwhile,
Thanking you


amarish shah

Nov 7, 2009


why you are not positive to mark mobius .you have not written anything .



Nov 7, 2009

SMS (Sardar Manmohan Singh ) has once again just played to the gallery by unwinding just about 0.5% to 2% of the 1005 equity of a few useless PUC's ! Almost all these PUC's have , over the years , become rusty and totally unproductive and are a huge burden for SMS government to carry with ! None of the "offloaded" PSU's will turn out to be BHEL,SBI or ONGC's ! Beware !


G M Lalwani

Nov 7, 2009

My Self G M Lalwani investing in PSu companies
I want know about Kudremukh Iron Ore Company Limited

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