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Govt. triggers a meltdown in PSU stocks
Aug 5, 2013


If you take a look at the chart below, you will see that the PSU stocks have been heading only in one direction since the beginning of this year. And that is downwards. In fact the PSU (Public Sector Undertakings) stocks have lost a little over 30% since the beginning of this year.

The general concerns that are plaguing the overall stock markets have affected the PSU stocks as well. These include the economic slowdown, higher interest rates, slowdown in investments, etc. In case of some PSUs, poor performance and disproportionally high risk is also the reason for investor apathy But one of the main reasons for this negative performance is none other than the biggest PSU shareholder - the government itself. Or more precisely the government's desperate need for cash.

The government is busy devising new ways to get more cash from the PSU companies. It plans to use this cash to help bridge its deficit problems and to fund its ridiculously ambitious public policies. Therefore it is trying everything to milk the PSUs for everything they have.

Initially the government was looking at raising money from the PSUs through disinvestment. It had framed an ambitious disinvestment plan that involved selling its own stakes in the PSUs. But this really did not work out in the way the government had expected because of the tepid stock market conditions. It did come out with a few FPOs (Follow on Public Offerings) but most of them were at prices below the existing stock prices. As a result, investors have come to believe that it would be more lucrative to exit these stocks at current prices and buyback during the FPOs at the lower prices. This has further accentuated the fall in PSU stocks.

As the disinvestment program is not really headed in the direction that the government wanted; the government came up with a new way to get more cash out from the PSUs. It told them that they should either come up with a plausible capex plan for the cash on their balance sheets or pay it out as a dividend. Naturally since the government is the largest shareholder in the PSUs, they would be the biggest beneficiaries too from a forced dividend payout. It further told some of the PSUs to buy back the shares held by the government.

The question now is what lies ahead for the PSU stocks? Should investors invest in them or should they give them amiss? To answer this they need to get back to the basics of investing. The basics of investing say that a company with sounds fundamentals, robust management and attractive valuations should yield higher returns for shareholders in the long term. And many PSUs rank high on these fronts. But the biggest risk they have is from their biggest shareholder - the government. Unfortunately for the minority shareholders, this major shareholder has very little interest in them. It is more interested in its own profits rather than worry about the minority shareholder concerns. And this skews the risk return matrix for these companies. Therefore investors should be cautious when it comes to investing in PSU stocks. They should keep the risks in mind while evaluating them for prospective investments.

Do you think it makes sense to invest in PSU stocks in India?

Data Source: BSE

This Chart Of The Day was published in The 5 Minute WrapUp - Are you thoroughly disappointed with PSU stocks?

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2 Responses to "Govt. triggers a meltdown in PSU stocks"

Amit.Jain

Aug 18, 2013

Sector rotation is the term to focus on. Investors are off-loading the less promising and buying stocks in the performing sectors.

For a true blood investor, this presents a tremendous opportunity to buy PSEs, Sugar, Metals etc. Buy and hold for 5 years and get two to three times the FD that too tax free!

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Amit

Aug 12, 2013

Hi, even though the govt is killing or depriving the PSUs of their surplus cash, most of the Maharatnas are cash generating cos with good management and plausible business oversight and healthy order books ... i am still invested in these Maharatnas and use any correction of 30% to accumulate more but also following the EQM philosophy of not having any stock with more than 5% weightage in my portfolio!

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