Do not rush for cheap PSU stocks

While the facts show that PSU’s are lagging in performance,it is not without reason. Market experts feel that the promoter’s (government in PSU’s case) focus is not profit maximisation but to meet their own social and financial needs.

Taking cues from government’s action or inaction,mutual funds in India reduced their holding in many PSU’s in the financial year ended March 2013. They also reduced their holding in 5 out of the 6 PSU’s that are part of the Sensex.

Market insiders say that most of the negativities around PSU stocks have already been priced-in their stock prices. “While they are available at cheap valuations,they can be bought for their cash surplus and high divident yield with a time horizon of 3-5 years but not for quick gains,” said Alex Mathews of Geojit BNP Paribas Financial Services.

There are others who feel that the market is not comfortable with the government’s intervention. “There is lot of scepticism in the market about government’s intervention in these companies and it needs to be seen if the cash they have is utilised for growth purposes or for government’s needs,” said another expert who did not wish to be named.

Oil marketing and producing companies have been waiting for price increase of petrol and diesel. But even as the crude oil hovered around $120 per barrel mark and even crossed $125 mark ,the government did not do the inevitable at times because of elections and on other occasions for lack of consensus with coalition partners. This will lead to a rise in under-recoveries for the companies and subsidy burden for the government.

Similarly,investors raised concern on Coal India’s fuel supply agreement (FSA) on coal prices and said that it should sell coal at market price.

UK based hedge fund,The Children’s Investment Fund Management,that owns 1.01 per cent in the company has estimated that CIL’s profit would jump by $19bn if the company sells its FSA coal at market price. The hedge fund has also initiated the process of bringing legal action against Coal India Limited (CIL) and its directors for acting against the interest of shareholders.

Also the public sector banks were left starved of capital in FY’12. Recently,according to the media reports,the government advised the public sector banks to cut their rates following the repo rate cut by the RBI. Experts say that this will impact the bank’s margins.

While the government is walking a tightrope as far as fiscal deficit and current accout deficit is concerned,market participants say that government may not be in a position to take best decision in favour of these companies amidst a challenging environment.

“The government may push PSU’s to declare high dividends so that they get some money and its earlier decision to ask cash rish PSU’s to buy stake of other PSU’s is not an optimal way to utilise cash,” said a leading market expert.

Brokerage houses too are not very enthusiastic about PSU’s for now. A Credit Suisse research report in July 2011 raised its concern over PSU banks and said the most significant risk for PSU banks is that it is likely to be called for ‘national duty’ in various creative ways.

“We would avoid PSU banks. They are over-bought,the most exposed to a potential surge in yields,and are also likely to be called forth for ‘national duty’ as the government’s finances remain under stress,” said the Credit Suisse research report.

Market experts say that there are better opportunities in the market and with rising government intervention in the decision making of these companies,the shareholders may be left wanting for more.

—sandeep.singh@expressindia.com