Are you thoroughly disappointed with PSU stocks? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are you thoroughly disappointed with PSU stocks? 

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In this issue:
» Can the FM turnaround the economy?
»  Asia has a US$ 7 trillion problem
» Has global oil demand peaked?
»  Investors warming up to Euro zone
»  and more....


00:00  Chart of the day
 
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.

Data Source: BSE

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? Please share your comments or post them on our Facebook page / Google+ page

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01:35
 
The jury is out. We recently recorded the lowest growth rate in a decade in the year gone by. And as per a lot of experts, the current year does not look that hopeful either. As if policy logjam and Government's all out efforts to achieve its social objective in view of the impending elections were not enough, we now have a stubborn rupee and a dangerous trade position to contend with. Thus, with so many challenges confronting us, does our Finance Minister have it in him to turn the economy around? We don't think so. Measures outlined so far have looked more like attacking the effect rather than addressing the cause. Besides, the Reserve Bank of India (RBI) seems to have made it clear that it is not going to play ball. Its first priority is helping the rupee find its level and if it comes with a short term pain to the economy, so be it. We do laud the central bank for taking such a step. Cleary, they hardly have any levers by which to make the economy grow. Such powers rest only with the Government. And it seems to be making a mess of it by keeping their eyes firmly fixed on the next elections rather than India's long term economic future.

02:30
 
The Asian financial crisis in 1997 had scarred the economies of many countries in the region. So deep were these scars that most countries began to build up reserves in order to insulate themselves from further shocks. The result has been that many of them including China and Japan are flush with reserves all denominated in US dollars. And this is proving to be a problem for the region given that the dollar's value has been increasingly called into question. Especially since the US economy is saddled with massive debt and the government is looking to raise the debt ceiling. All of this means that Asia will have to rethink its strategy. Essentially it will need to realise that huge reserve holdings do not necessarily signify financial strength. The problem is that China and Japan which have the largest holdings of US Treasuries will most likely find it difficult to offload US debt. Indeed, if they begin to do so, the repercussions on the global markets will be huge. As mentioned in an article in the Business Standard, the least Asia can do is stop adding more to its dollar holdings. And probably consider ways of bringing this home so as to finance critical areas such as education, infrastructure and the like. Smaller economies would be able to do this better because their exposure would not be that big. But China and Japan certainly have a big problem on their hands.

03:00
 
The demand for oil is linked to global economy. Booming economy increases the demand for oil and vice-versa. While the Western economies may have slowed down, dampening the demand for oil emerging markets like India and China has been on the rise. Rising urban middle class and increasing disposable income has increased the demand for cars and thus oil. In fact, as per British Petroleum, the demand for oil is likely to increase from 89 m barrels per day prevailing now to about 104 m barrels per day by 2030!

Nonetheless, it appears that their projections are quite optimistic and the demand is likely to decline rather increase from here on. In short, we are more or less at the peak of oil cycle. And there are quite a few reasons as to why the oil demand will decline. For one, the advent of shale gas is likely to compress oil demand. Recently, there have been quite a few discoveries which are likely to increase the gas reserves. If gas replaces oil as a measure of fuel it is obvious that oil demand will fall. The second factor which may reduce oil demand is technology. It may be noted that these days vehicles have become lighter. The engines are being designed to be more fuel efficient. All these factors are likely to reduce oil demand since it reduces consumption. All in all, it may be true that the oil demand from emerging markets is rising. However, alternative measures like use of gas and improved technological advancements may dampen the oil demand in future.

03:55
 
Is this a cigar butt or a value trap? Before you start wondering which wonder stock we are referring to, let us tell you that this is not about a stock. But about an economy as a whole. The European economy has hardly offered any confidence to investors over the past two years. Greece was just the tip of the iceberg. Ever since Spain, Italy, Portugal and others have left the economy's investment prospects high and dry. It is not just growth that has evaded economies in the eurozone. But poor credit history has threatened the sanctity of Euro as a dominant currency as well. Needless to say, the European stock markets have been in the 'fear' mode for a while now. And valuations have been hugely discounted. So does that make Europe a long term value buy? Well, if one were to look at statistics, even a nominal growth from the current zero GDP growth stage could offer huge upsides. Wall Street Journal has reported that investors are increasingly warming up to European stocks. Their relative discount to US markets seems to be wooing investors. But we believe the problems with Eurozone are much more deep rooted that lack of GDP growth. And investors speculating on short term upsides do have a high possibility of being stuck with value traps.

04:35
 
In the meanwhile after opening the day on a positive note Indian equity markets have been trading closer to the dotted line. At the time of writing, the Sensex was up by just 15 points (0.08%). The other Asian markets closed the day on a mixed note with markets in China and Taiwan closing in the green while those in Japan and Singapore witnessed selling pressures.

04:55  Today's investing mantra
"If you're an investor, you're looking at what the asset - in our case, businesses - will do. If you're a speculator, you're primarily forecasting on what the price will do independent of the business."- Warren Buffett
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12 Responses to "Are you thoroughly disappointed with PSU stocks?"

Prof Keshava Nireshwalia

Aug 18, 2013

The article could have had a better message by inclusion of a few case studies.

Like 

vrknair

Aug 9, 2013

God save us from PSUs!

Like 

v.nair

Aug 9, 2013

God save us from PSU stocks!

Like 

Sushma

Aug 6, 2013

Here we have a government which is least concerned with poverty levels of the poor. They are devising such schemes in name of social upliftment which can put money in pockets of their would-be member of parliament for 2014 election. May God never bring such type of puppet government to power in future. They have ruined the economy of the country. They have no far sight. Till 6 months back, they had encouraged every Tom ,Dick & Harry to sell gold through banks /post offices and what not. They did not have this farsight about requirement of Dollars that time for purchase of such gold.
And now, they have gone to other extreme, thereby killing gold jewellery industry and encouraging gold import through smuggling and other illegal routes.

God save our country !!!

Like 

Dr. Arun Draviam

Aug 5, 2013

Last week SEBI ventured to say that it would protect the minority interest in the Holcim proposal to strengthen its hold on ACC at the cost of Ambuja Cements cash accruals. Finally what happened is not known. But we can guess nothing worthy will come out. In the case of PSU it is even worse. Could SEBI take any action against the Govt for the price at which the cash-rich NMDC selling below the divestment price? Can SEBI take action against the Govt for the worst pricing done by the Merchant Bankers engaged by Govt?

Like (1)

Ravi shah

Aug 5, 2013

when you yousrself are not confident of PSU STOCKS then why did u recommended BHEL TO BUY?I Bought BHEL on yr recomdn in stock select and now u are saying it has become very unsafe.Didn't u know disinvesment plan of govt way back? what to do now.BHEL has corrected today 25%.is yr advice still valid for long term?pl reply

Like (2)

shamsundar

Aug 5, 2013

If I have invested in an asset and I am in difficulty, I would like to get return from the asset I have invested in. I see nothing wrong in this desire. If PSU's are sitting on a cash-pile and have no reasonable investment avenues, it is natural for the investor to seek refund of money. You seem to have ulterior motive in continuously blaming govt or any thing that is related to it, remotely. Highly biased negative analysis. Desist from political agenda, else you would be no where in the market in future.

Like (1)

b khosla

Aug 5, 2013

If the Govt. is run on a Socialistic pattern of Society and
the NGOs/NAC have a dominant say in the Govt. keep the PSUs at a safe distance away.

Like (1)

Girish

Aug 5, 2013

Why PSUs alone. Look at MCX and FT stocks. Even FIIs, MFs and stock analysts could not detect the problems. These scamsters are that good in India.
Anywhere the minority stock owner's interests are compomised you see massive loss of investor wealth. No wonder common man in India is happy to stick with what he knows and what he can envision for next 20 years- FD, PPF, Gold and real Estate.

Like (1)

Nikhil Shah

Aug 5, 2013

I am surely disappointed with PSU stocks.

Forget about value investing principles, valuation, etc. and don't invest in PSU stocks. Pay importance to the quality of management of these stocks. And LOL, who is the manager, GOI (major shareholder)who is a MAHACHOR.

So dear investor community, do not buy PSU stocks.

Thanks,

Nikhil

Like (1)
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