Ask any investor or professional fund manager which set of stocks is the most frustrating to own in India, and chances are that she will promptly name public sector undertakings (PSUs).

The Nifty PSE Index, which features non-bank blue-chip Centre-owned public sector firms, has delivered an abysmal return of 3.3 per cent in the last ten years while the Nifty50 has managed 12.3 per cent. But in the last one year, the Nifty PSE Index has suffered a 19.6 per cent loss, while the Nifty50 is up 2 per cent.

Missing the bus

In the bull market that has been under way for the last six years, investors have been gung-ho about the profit outlook for domestic companies, re-rating the price-earnings ratio of the Nifty50 from 19 times in October 2012 to 26 times now.

But this optimism has not extended to PSUs. The Nifty PSE index has seen its price-earnings multiple actually shrink from 16 to 10 times.

It is not as if investors aren’t aware of PSUs’ fundamental strengths. Many of these firms dominate the sectors they operate in, serve established markets, generate abundant cash flows, pay liberal dividends and have low debt on their balance sheets. But for stock market investors, these obvious strengths are often eclipsed by a wild card factor that looms large over their prospects — frequent government interference.

In the last decade or so, it has become nearly impossible to make assessments about the long-term profits or prospects of listed PSUs, because of out-of-the-blue interventions in their strategic, operational and financial decisions, by a promoter who seems to have scant regard for shareholder returns.

Arranged marriage

A good illustration of this is ONGC. With fuel prices deregulated in 2015 and global oil prices shooting through the roof from 2016, the last three years should have been party time for investors in this upstream oil company. But ONGC’s stock price has delivered nil returns in this period.

A series of government-directed moves that have sharply depleted ONGC’s cash coffers and reined in its book value have undermined investor confidence in the stock. In 2016, ONGC was co-opted to help out the debt-ridden Gujarat State Petroleum Corporation by shelling out ₹7,700 crore to acquire a not-so-promising gas block in the KG basin. Next year, it was ONGC’s turn to help the Centre fatten its disinvestment kitty by buying its 51.1 per cent stake in HPCL for over ₹36,000 crore, at top-dollar valuations.

These mega-deals have cleaned out the oil giant’s surpluses and forced it to take recourse to debt to fund its operations. But even more worryingly, they seem to have hobbled ONGC’s ability to invest in core expansion projects that hold the key to its future profits and cash flows. In the latest round of bidding for open acreage licences, ONGC bagged just two of the 55 blocks on sale. This explains why, despite its earnings expanding by 70 per cent between FY16 and FY18, ONGC’s stock valuation has plummeted from 16 to 10 times earnings.

Undeterred by this experience though, the Centre is in parleys to offload its stake in SJVN to NTPC and to get Rural Electrification Corporation to buy out its holdings in Power Finance Corporation, at an outlay of ₹20,000 crore. The arranged marriage route is being tried out to salvage ailing public sector banks too.

The government’s standard justification for these forced marriages is that they consolidate PSUs into globally competitive giants. But the ground reality is that such deals end up damaging the balance sheets of healthy PSUs, creating a plethora of operational and managerial challenges that they were better off without.

Social good

Then, there’s the constant conflict that PSUs seem to face between what is commercially sound for their business, and the social obligations imposed on them. Public sector banks shoulder a disproportionate burden for many of the Centre’s do-good schemes — from agricultural and MUDRA lending, to demonetisation and opening Jan Dhan accounts. Oil marketing PSUs have just been asked by the government to absorb a part of the retail price cuts on ‘deregulated’ fuels, denting their profits by over ₹7,000 crore.

Not quite disinvestment

Seeing how government intervention is a big risk for PSU stocks, they may have fared better in the markets had there been real progress on privatising these firms. But after taking a pragmatic approach to disinvestment in the first couple of years of its term, the NDA government has slipped back into jugaad methods favoured by the previous regime.

In the last year or so, LIC and other public sector institutions have become bidders of last resort whenever there are few takers for any disinvestment offer. With LIC mopping the government’s stakes in a rash of PSUs — from GIC Re to Garden Reach Shipbuilders — the ‘disinvestment’ programme is now proceeding at a brisk pace without any real privatisation or operational autonomy to these PSUs.

The other jugaad route appears to be stock buybacks. As many as 20 PSUs have bought back government stock worth over ₹23,000 crore in the last two years, to bolster the disinvestment kitty. This has neither lifted their stock valuations nor reduced the government hold on their operations.

Now, one does appreciate why short-termism rules government decision-making when it comes to PSUs. Given the strange workings of government accounting, the Centre is put under the microscope in every Budget for its ability to bridge the gap between its receipts and expenditure for the year.

But it is not required to account for its assets or present a balance sheet which captures the market value of its residual holdings in PSUs. If the government were required to prepare such a balance sheet, it would realise quickly the serious damage it is inflicting on its own wealth by milking PSUs for short-term gains.

Government accounting is unlikely to change anytime soon. But there’s another factor that requires it to take greater care: over how it is treating public investors in listed PSUs.

Given its tight fiscal constraints, the government itself is set to be a prodigious fund-raiser from the capital markets in the next few years, to recapitalise public sector banks, fund ambitious road and railway projects and meet the capex needs of PSUs. Unless the government wakes up in time to repair its tattered reputation as a promoter of listed entities, public investors may give these plans a wide berth.

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