The PSU Paradox: Why Mr Market Loves One Over the Other

Recently, I was going through the financials of a decorated PSU company, and I couldn't help but notice how Mr Market has been very generous in its valuation of the company.

Let us learn about this company through an interesting case study.

Here's the financial of two PSU companies. Now, you have to tell me which one deserves to be treated better by investors.

Here's the P&L statement of the first one.

This PSU has more than doubled its topline in the last 10 years and same for the bottomline. Although the performance is stable, the growth is not very impressive.

Over 10 years, the topline and bottomline should have atleast quadrupled. But instead, they have only doubled.

Here's the balance sheet of the same PSU. The company has a bit of a debt problem. It's debt to equity has consistently been higher than an acceptable level of 1.

Otherwise, the growth in balance sheet has been steady. It appears that the company makes its capital allocation quite judiciously and is not in a hurry to grow. So, the balance sheet is certainly leveraged but there is stability about it as well.

Now, let us move to the second PSU.

Well, if the performance of the first PSU, which doubled its topline and bottomline in 10 years was disappointing, this even is even more so.

This PSU has grown its topline by only 50% over 10 years while its bottomline has grown by around 30%. However, like the first PSU, the performance has been largely stable.

When it comes to the winner, the first PSU seems to have a definite edge in this round.

Let us move on to the balance sheet of the second PSU.

Here, the balance sheet has not grown as fast as the first PSU with total size increasing by 50% from Rs 100 bn to Rs 150 bn.

The good thing about this PSU is that it is a zero-debt company. Unlike the first company that was leveraged, this second PSU's debt has consistently been almost zero, which is certainly a good sign.

Hence, when it comes to the balance sheet, it is this PSU that has the edge in my view.

Let us talk about how their ROE or return on equity has moved over the last 10 years.

Here, both the PSUs have shown remarkable consistency in their ROEs. It is the first PSU however that has a slight edge over the second. All its ROEs i.e. 10-year, 5-year, 3-year and even latest, higher than the second PSU.

Here's the summary. While both the PSU's have shown stable performance over the years, based on numbers alone, it is the first PSU that has a slight edge over the second one in my opinion.

Its growth was better and its return on equity was better. The only area where it lagged was the balance sheet. It had significantly higher debt relative to its equity as compared to the second PSU, which is virtually a debt free company.

So, maybe PSU 1 has an edge or may be it does not. However, here's the interesting bit.

Investors in the stock market have always valued the second PSU significantly higher than the first PSU. Yes, that's right. A PSU that has grown slower than the first one and which had lower ROEs, has enjoyed a much superior rating by the investors.

Over the last 10 years, investors have given the second PSU a PE multiple of more than 30 whereas the PE multiple given to the first one has been a little over 10.

It's the same situation when it comes to the price to book (PB) value. The second PSU has commanded a PB multiple almost three times the PB multiple of the first PSU. The story is quite similar from a 5-year perspective as well.

In short, investors have always put PSU 2 on a much higher pedestal than PSU 1.

But why is this the case?

Well, to be honest, I don't have a clear answer to this but I will try anyway.

But before I do that, let me reveal the names of the two stocks for you.

PSU 1 is none other than National Thermal Power Corporation (NTPC).

PSU 2 Container Corporation of India (CONCOR).

Yes, Container Corporation has enjoyed a significantly higher PE as well as PB multiples over NTPC historically.

When you think about the business models of these companies and about the industries to which they belong, it does appear sensible that Container Corporation should be valued significantly higher than NTPC.

After all, power is a regulated sector with high capital intensity and limited growth prospects.

But despite Container Corporation's superior business model, it's not reflected in the numbers as yet. Its growth has lagged that of NTPC, and its return ratios are also at par or slightly below NTPCs.

So, why is it that investors have been willing to pay a significant premium to buy shares of Container Corporation as compared to NTPC.

I am sure you would have heard of the famous book by Jim Collins titled Good to Great.

Good to Great achieved a cult status back when I was doing my MBA. Management students were often seen walking around with a copy of the book in their hands.

The book had a byline which went something like this. Good to Great...Why Some Companies Make the Leap...and Others Don't.

Well, investors are hoping for the exact same thing with Concor.

The reason it is getting significantly higher valuations as compared to NTPC is that the company is expected to make a leap from Good to Great.

There's no doubt that NTPC is a good company. But can it become a great company? Looks unlikely given the sector it belongs to and the regulatory oversight it finds itself under.

However, investors believe that Concor is certainly capable of taking that leap from Good to Great.

India dreams of becoming a developed nation by 2047. And if this dream has to turn into a reality, both our manufacturing as well as our exports have to step up.

Without a robust manufacturing as well as exports set up, it will be very difficult for us to achieve a developed status.

And if manufacturing picks up, more goods will have to be transported through Concor's containers, its wagons and its rakes.

More freight stations as well as container depots will have to be built, thus giving a big boost to both the topline as well as the bottomline growth of Concor.

It's this the possibility of this growth that is pulling investors towards Concor and making them pay a significant premium over its peers like NTPC.

Do you believe this dream will turn into a reality, making Concor one of the leading beneficiaries? If yes, then Concor might be a potentially good long-term investment.

However, if you think that the competition in the sector is going to intensify and Concor will wallow in mediocrity like it has done in the past, then a caution is warranted.

Let me know your thoughts on these stocks.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)