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PSUs - A lost opportunity

Jun 23, 2000

Most will remember the talk in late 1999 that 2000 will be year of public sector units. They were largely referring to oil and telecom PSUs. The government it seems has scuttled the opportunity of a lifetime. Financial performance notwithstanding, Indian oil and telecom PSUs are very rich. In terms of assets that is. It is however widely accepted that save for some odd PSUs, all others require drastic action if the government was interested in salvaging whatever was left of them. The government seems to have got that opportunity. The markets, even after the recent correction, are still trading at 80% over the lows touched in 1998. However it is clear that the government is determined not to make most of the opportunity.

Just to put things in perspective here are some facts. These pertain to FY98 as the current data has yet to be made available. The capital employed by central PSUs stood at Rs 2,231 bn (i.e. twice the size of the fiscal deficit). The net profit was a meager Rs 137.3 bn, most of which is accounted for by the oil and telecom PSUs. Finally, of the 236 central PSUs, 100 were loss making. A pathetic performance, given that a number of these companies, are monopolies in their respective segments and are receive subsidized funding from the government.

Recently, the British government set the ball rolling by auctioning 3G (third generation licenses) telecom licenses. In the process it raised billion of dollars (it amounted to over 80% of India's central government fiscal deficit). Many countries are now planning a similar auction. Such windfalls help government's rectify any deficit that may have cropped up over the years. Alternatively it could be used to step up social spending. India with its vast geographical base has however failed to capitalize on any such opportunity. As a result, its fiscal situation continues to deteriorate. On the social condition front, one need not elaborate.

Several Indian PSUs offer fantastic investment opportunities at this point in time. Consider the oil PSUs (read BPCL, GAIL) for one. However, government control has stifled their valuations. The incumbent government is making the right noises in favour of disinvestment. But so have some of the previous ones. Expectations are running low. But, once the government (whether this one or the ones in future) were to go ahead, and in all probability they will, expect valuations to rise dramatically. One has to make the call regarding the timing of the disinvestment. Those who get the timing right will find themselves 'in the money'!

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