The best thing to happen to Indian PSUs - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The best thing to happen to Indian PSUs 

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In this issue:
» The side effects of a bailout
» The impact of global tension on forex inflows
» Outlook on the movement of rupee, silver and gold
» Wall Street goes back to its spending ways
» ...and more!!


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00:00
 
Indian PSUs are not particularly known to feature in the reckoning of companies with highest efficiency; profitability or pay scales. Such has been their reputation that the best and brightest minds often leave them for greener pastures. But all of that is set to change for the better. And with the right results may even end up being the inflection point for Indian PSUs.

The PSUs are typically armed with legacy assets at very cheap costs. Ideally, these companies should easily give their private sector counterparts a run for their money. But inefficient execution and aversion to adopt technological changes has deprived them of high margins for years. The bane of contention has been very strict labour laws governing them. The latest approval from the nodal agency for India's 246 state-run companies thus comes as a welcome relief. It has allowed sacking of the non-performing staff in PSUs. The number could go up to 10% of the total workforce. This landmark decision could pave the way for companies to rationalize employee base. In addition, they could aim at improved efficiency and quality. The move to align pay scales based on employee performance could also become the bait for attracting skilled workforce. And not to mention the ability to compete effectively with the private sector.

This move may be seen as the government's attempt at making PSUs more attractive and stimulate its disinvestment plans. Nevertheless, given that the Navratnas (9 largest PSUs) alone contributed 16% of the country's GDP in FY10 (according to D&B), their higher profitability would certainly be in the interest of minority shareholders as well.

Do you think firing non performing employees will help India PSUs become more profitable? Share your views with us.

01:15  Chart of the day
 
Most Indian consumer durable companies are keen to sell their wares in the hinterlands due to rising demand. The uncontained rise in food prices has also been attributed to demand side pressures from rural markets. Better earning power and increased aspirations have lead to a consistent rise in the average consumption expenditure in rural India. Today's chart shows that the same is expected to grow at an average rate of 4.6% between 2005 and 2025. Encouraging signs indeed for a consumption driven economy like India.

Data source: McKinsey

01:45
 
First Greece. Then Spain and France. And now Ireland. No we are not talking bailouts here. But perhaps direct fallout of it. The WSJ reports that the international bailout for Ireland has left its citizens fuming. Huge wave of anger has erupted amongst the Irish public as they see it a terrible blow to the nation's sovereignty. "The true ignominy of our current situation is not that our sovereignty has been taken away from us, it is that we ourselves have squandered it," wrote a leading Irish daily and summed it up quite succinctly. The reference was indeed being made to the Irish Government who in recent years colluded with builders and banks and let a huge real estate bubble build up. It is the bursting of this bubble that brought Irish economy to its knees and forced it to seek international support.

If one is wondering why is it that only European economies are going for bailouts and not the other nations like Japan and US, which are also massively indebted, it is for one very important reason we believe. Unlike countries like Greece and Ireland, the US and Japan are free to print their own currencies and hence, buy themselves some more time. But this doesn't mean that US and Japan will never face issues like massive currency devaluation and even public riots. They certainly will if they do not induce austerity measures and stop this reckless printing of money. As someone has said, there is no easy way out of huge indebtedness.

02:25
 
At a time when stock prices are flirting with their all time high valuations, investors have safety of returns on the top of their minds. Addressing this very need, a recent webinar hosted by Equitymaster sought to offer guidance on how currency and commodity derivatives could be used to diversify a portfolio. Derivative analyst Asad Dossani had some very interesting observations to make on how investment in commodities like oil and gold could have safeguarded investor returns during the stock market crisis in 2008, 2009. More importantly, he also shared his outlook on the Indian rupee as well as its impact on gold and silver prices going forward.

In case you missed the webinar, you can still view a few clips here.


03:13
 
The recent tensions between the two Korean nations have caused panic among investors across the globe, especially in the Asian markets. So what does this geopolitical uncertainty in the Korean peninsula mean for the Indian market? Generally, any tension or uncertainty in any part of world is bad for equity markets. In the past when tensions rocked oil producing regions, they had an impact on India's fiscal situation due to the surge in oil prices. In the current scenario, that factor is not present. The Indian market could benefit from the current tension as there could be outflows from South Korea and part of that money could enter India. The short-term reaction of the market, which we witnessed on Tuesday, was more out of fear that the US market might react negatively to the Korean crisis and prices might fall further, leading to a situation where traders were just throwing away stocks. The fact that the market has corrected a bit in the past few days and valuations are down also go in favour of India.

03:42
 
In 2010, the Indian retail bond market saw more action than that over the past 8 years. The additional Rs 20,000 tax break offered for investing in long term infra bonds was the foremost reason. Bond sales to individuals exceeded Rs 50 bn this year. According to SEBI, this is the most since around Rs 56 bn was sold in 2002.

IDFC and L&T Infra both recently offered these tax free bonds to individual investors. More companies like PFC, REC etc are planning to launch these bonds in the latter half of the year. Individual savings in India equal to almost 12% of the economy. Tapping into the retail investor pool for financing long-term infra projects such as railways, power plants, ports etc is key. With the tax saving season around the corner, buying such bond for tax saving purposes will increase. The bond market in India was desperately in need of some more depth. We can certainly hope that fiscal incentives help attract more investor interest to the segment.

04:18
 
Confidence has been ebbing away from the US economy. Even the Fed has revised its growth estimates for the economy. But the Wall Street professionals who had triggered the crisis are oozing with confidence. In the past two years these professionals had cut back on extravagant spending and were leading a relatively more frugal life. However, with the revival in the US stock markets, these professionals are now opening up their purse strings and spending heavily on personal extravagances. These range from high end cars to luxury parties to expensive dining. It is interesting to note that this increase in confidence is not from an actual increase in pay. This stems more from the fact that they are no longer scared of losing their jobs. Considering that the US economy is still facing one of the worst recessions in history, we wonder if this confidence is misplaced.

04:40
 
After hovering close to the dotted line for most part of the early session, Indian markets slipped into the negative territory in the final hour of trade. Led by weakness in engineering and financial companies, the BSE-Sensex was trading 110 points lower at the time of writing this. The BSE midcap and smallcap indices were also marginally down. Most other Asian markets closed in the red. The European markets have opened on a cautious note.

04:55  Today's investing mantra
"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger
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46 Responses to "The best thing to happen to Indian PSUs"

ved

Dec 19, 2010

firing is very easy job but not a solution i m working in psu & know the culture of psu how duffers are reaching on top & implementing non sense policies. selection process is good but promation process is non-sense.

Like 

Sudheer Godgeri

Dec 14, 2010

True! BUT it should also include some form of corporate democracy in which the TOP MANAGEMENT is also made to be responsible for their whimsical decisions - often seen in public sector - and be punished for abuse of power as well.

This appears bleak as the public sector managers are a different group ( IAS/IPS etc.) and their jobs have extra ordinary protection - to make public sectory truly competitive - even guys from top must be recruited not just from IAS BUT from top private sector companies as well : Only this will inject some true performance culture or the culture of groupism and favoritism will prevail.

Like 

Anind Goswami

Dec 1, 2010

PSU's are inefficient because of poor management, poor attitude towards work, unaccountability and a bureaucratic culture so such staff should be fired and virtuous persons should be tried.
Anind Goswami

Like 

basappa salawadgi

Nov 28, 2010

EMPLOYEES ARE VALUABLE HUMAN RESOURCES AND ASSETS OF THE ORGANIZATION.THEY WOULD HAVE GAINED KNOWLEDGE AND EXPERIENCE OVER THE PERIOD IN SERVICE. NON PERFORMING EMPLOYEES SHOULD BE LISTED, STUDIED, MOTIVATED AND COUNSELED. IF NEED BE TRAINING AND REHABILITATION IN LINE WITH THEIR SKILL AND INTEREST MAY YIELD BETTER RESULTS.AS A LOST RESORT EXIT OPTION WITH ATTRACTIVE PACKAGE MAY BE CONSIDERED. AS OUR HOLY SCRIPTURES PREACH, TO CARE FOR EVERY THING WITHIN THE BOUNDARY IS THE DUTY OF KING. IGNORANT ARE OUR CHILDREN AND KNOWLEDGEABLE ARE PARENTS. FIRING IS NOT A SOLACE AND WOULD SEND WRONG SIGNAL ACROSS THE GLOBE, WHICH IS DETRIMENTAL TO THE IMAGE OF THE NATION.

Like 

Manoj Kumar

Nov 27, 2010

Firing employees is the easiest way to profitability for any firm especially when distressed. However in good times boosting of profitability is also dependent a lot on its employees. So easier hiring and firing rules for the corporate world and including PSUs are good. However there is but one caveat, the government organisations have no wherewithal of assessing the productivity of an employee and such decision are likely to be governed more by personal biases then the rational assessment.

Like 

Sarat Palat

Nov 27, 2010


Definetly yes. Unproductive staff should be sacked. Whether public or private a company is a business organisation. When a PSU performs well the profit is going to the Govt. treasury, i.e it belongs to people.

Like 

Anand

Nov 26, 2010

Why can't other countries print their currency?

Like 

Karanjit

Nov 25, 2010

Definitely.Unless you WANT TO defy the DARWIN'S THEORY!

Like 

Ramesh

Nov 25, 2010

Un productive labour should be terminated without waiting for any decision. But company should not play any games in it to take any reveng against some one whom they don't like. Revised Laws are required for this.

Like 

P. Koshy

Nov 25, 2010

Those who work in an organisation should have the fear that they can be replaced if their performance is not acceptable. However this fear should be fair. Those on the top as well as those below them should heave the same realisation that they are expected to give results.

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