What is a PSU?
A government of India owned companies are called a Public Sector Undertaking or a PSU. Government-owned means central government owned, any state government owned, union territorial government-owned or a mix of them.
A company to be classified as PSU, the government must be a majority shareholder. Depending on central or state government as majority shareholder, the PSU may be classified as Central Public Sector Enterprises (CPSE), or State Level Public Enterprises (SLPE)
Why I avoid Investing in a PSU?
Whenever I see a Government as majority shareholder, I don’t look into any financial data and avoid it for investment.
The stock selection process that I follow has a hidden parameter to avoid a PSU.
- In Investment Checklist, the PSU fails to pass the operational efficiencies parameter.
- In Fundamental Analysis, the parameter for government policies helps me avoid a PSU.
- In Business Checklist the government regulations part is to avoid a PSU.
PSUs were doing great in the pre-2005 era but being my history of being in the market for a decade, I am yet to see any significant performance in government-owned companies.
I remember when I had invested in Reliance power IPO (everyone makes mistakes 🙁 ), BSNL was looking to file an IPO. It was supposed to be the largest IPO in Indian history at that time. The financial crisis delayed it and as of today, I have my doubt if it is even considering an IPO.
Air India is one more example where. It can’t even hit the news headlines for anything good.
The PSU banks are constantly losing the market share to private banks. Like MTNL and BSNL, it is only a matter of time when they have given up all the market share to private banks.
Source: IBEF Report on Banking sector.
I have chosen banking sector for a reason.
Banking is one sector where till date in the history of past 100 years across any leading market of the world there has never been a single bank that has gone out of business for its lack of operational efficiencies. It is always because of a bad loan or no loan recovery.
Despite such an advantage for a sector as a whole, the PSU banks aren’t able to participate in the Indian growth story.
In 2018 business needs to re-invent itself with efficient operations with an urgency to grab market share. I see every PSU lacks the eagerness and willingness to perform.
The Sad Performance of PSUs
Here are the charts of some of the popular PSUs that are part of Nifty and hasn’t performed in the last decade.
The performance of SBI in the past 8 years.
It is at a time when Indian banking sector has been growing steadily and is possibly one of the best performing sectors in the market. The market caps of private banks has exploded at the same time.
Any SBI branch will have a lot of customers around but still, it doesn’t drill down in the share price.
An FD in SBI would have given better returns than an investment in SBI for the past 8 years.
A maharatna company and this is the performance of the company for its investors in the past 8 years.
The only coal player in India, a maharatna company yet this is the chart of Coal India.
Charts by ChartInk.com
The performing PSUs
From time to time some PSU may perform. Those are more for traders than a long-term investor or buy and hold investor.
The best performing PSU in the past few years have been HPCL, BPCL & IOC. The reason for the performance is best known to everybody. In the last few years, oil prices have seen rock bottom and the prices of petrol and diesel aren’t controlled by the government led them to perform.
The question is can they continue generating a similar return for its investor and I don’t think they can.
I can go on and on with examples of PSU underperformance. As an investor, the certainty of non-performance from PSU has made it very easy for me to avoid it as an investor. Do you invest in PSUs?