Public sector companies are finally getting their fair share of attention, partly bolstered by the government’s resolve to push through disinvestments.
Top investors present at the Moneycontrol Muhurat Roundtable picked the PSU basket as a good hunting ground for value that could deliver decent returns in the coming year.
The government has shown its serious intent for taking the privatisation route for public sector undertaking (PSUs). The disinvestment of Air India has been a big feather in the cap for government. This has been well received by the overall market participants which, however, was not the case earlier.
“The government has shown that it has the ability to make the hard decisions. I didn’t get a whiff of complaint anywhere when we privatised Air India,” Ramesh Damani, founder of Ramesh S Daman Finance Pvt Ltd, said.
Damani points out another example of issue related to IRCTC convenience fee, which proved the right intent of the government to protect the interests of minority shareholders (general public).
“They (government) did something that was detrimental to minority shareholders, it was something that didn’t protect their interests and within 12 hours, the market forced them to change it,” he said. This thing will not be repeated, he said.
Damani nurtured his affection for Bharat Electronics, one of his favourite bets that was languishing at a market cap of Rs 300 crore in 2003 when he picked it up and grew it to nearly Rs 50,000 crore, through the years. “Jab Pyaar Kiya Toh Darna Kya” – that’s how he drove home the message that it called for courage to pick up stocks that are out-of-favour but if there is value, these could be highly rewarding.
The overall sentiment towards state-run companies is now changing with savvy investors so far refrained from this lot now willing to venture into this terrain. This was, to a large extent, a no-entry zone for many till a few months ago.
“I think that the whole debate about private companies and public sector companies has been very one-sided,” said Prashant Jain, CIO, HDFC Asset Management. Jain has kept his faith in the PSU basket with stocks like Coal India, NTPC and oil companies featuring among his top holdings for the last few years, even when the markets were giving these stocks cold shoulders. He is of the view that there are public companies that are not good and also that are good.
“The value destruction has happened far more or maybe to a large extent in the private sector as well,” Jain said, citing examples of many private banks, NBFCs and private power companies, which had not just the market caps and other things going for them, but still faced a lot of pain.
In select businesses, PSUs are quite competitive and sustainable like the oil companies and to a certain extent some of the PSU banks. “Over time, we should find better price discovery for other PSUs as well,” Jain said.
Damani endorsed Jain’s views and suggested that the best way for a value investor to differentiate whether a company has value or is a value trap “is to look at the balance sheets and decide if the company is trading at a fraction of its value, or is trading at exorbitant multiples”.
People who are not willing to look at PSUs are missing the boat, Damani added. He feels there is still some value and some great opportunities in that area which can give good returns.
Madusudan Kela, Founder of MK Ventures, agreed with Damani about good and bad companies in the market. “There are flexible investors, and there are adamant investors, and the markets have always rewarded the flexible investors,” he said.
The discussion established that the ‘I will never do this’ attitude doesn’t work in the investment world and is not the best way to approach the markets.
The PSU stocks, however, always come with a rider – ownership. “I would not buy PSUs, because I don’t think when I own a PSU stock, I for not even one-minute feel that I am an owner of that company,” pointed out Samir Arora, Founder and Fund Manager, Helios Capital.
The valuation of any company does not come from the present value of future dividends, Arora said. It comes from the ability to do M&As, to sell a company do a joint venture, do a private equity transaction. None of these things can be done with a PSU, which makes them less favourable.
Arora, however, said in the same breath: “if a particular PSU is going to be privatised or has something cheap, yes, please go ahead and buy.” He has bought into State Bank of India and Container Corporation over the past year.
As markets look expensive across the board, the PSU basket appears attractive just because of the relatively low valuations. More importantly, the government’s monetisation plan is also making investors hopeful of value unlocking in these stocks.