Vijay Kumar Gaba: PSU

Showing posts with label PSU. Show all posts

Thursday, March 7, 2024

Is your glass half empty too?

We are currently in a market phase where most asset prices are rising. Equity indices (Nifty over 22200) are close to an all-time high. Gold prices (over US$2125/oz) are at an all-time high. Bond prices (benchmark 10-year yields 7.05% from 7.50% a year ago) have recovered from their recent lows. Bitcoins (US$66000) are trading at an all-time high. Real Estate prices in India are also close to their highest levels in most metros.

Prima facie, all investors should be celebrating FY24 as one of the best years in their investment journey. However, a recent interaction with many small (retail) and high-networth investors indicates that for a significant proportion of investors, it may be a “glass half empty” kind of situation.

The common regrets of over 100 investors I spoke to at three different gatherings could be listed as follows:

· They stayed invested with the top-performing fund managers of 2018-2020. However, these fund managers have underperformed materially in the past couple of years.

· They remained overweight in the bellwether stocks like HDFC Bank, Kotak Bank, Asian Paints, Hindustan Unilever, Dabur, ITC, Brittania, Infosys, Bajaj Finance, SRF, UPL, etc. These stocks have massively underperformed Nifty in FY24.

· They either participated aggressively in failed IPOs; or missed successful IPOs: or sold at panic lows; or bought at post-listing euphoric highs.

· They wrote off conventional energy and regret not participating in the massive rally in stocks like Coal India, NTPC, Oil India, NLC, etc. Even though they have made very good gains in renewables.

· They took the advice to invest more in silver rather than gold. Silver has massively underperformed gold.

· Prompted by the semiconductor shortages during COVID-19, many people allocated decent money to Asian equities, especially Chinese and Taiwanese. This part of the portfolio has underperformed in the past three years.

· Some HNIs allocated decent money to US Bonds in December 2023. They were advised that the Federal Reserve shall start cutting rates in February and bond yields could fall to sub 3% level. It seems the rate cut has been delayed in the US and the bond yields are higher YTD2024. That part of asset allocation is giving some jitters now.

· They skipped investing in Bitcoins due to fears of regulatory clamp-down and negative publicity. However, the sharp outperformance of Bitcoin over Gold, USD, and Equities is making them regret it.

· The most common regret was losing money in option trades. Most of them increased their option trading activity by allocating more money. Some did it for fun sake – to get a kick. Many did it to make quick gains. The accumulated losses in options are now material in many cases.

For now, the consensus appears – a pre-election rally in March, higher volatility and range-bound market till May 2024, and a sharp rally post the formation of a new stronger BJP government. The portfolio positioning is aligned with this consensus.

Any deviation in the actual outcome, as compared to the consensus positioning, may see some panic unwinding, in my view. However, if the consensus proves to be right, we might see much higher highs in 2H2024.

Tuesday, September 12, 2023

Mice chasing the pied pipers

In the past few days, I have picked up many red flags that have further strengthened my conviction that the markets may be running far ahead of fundamentals. In my recent posts, I have pointed out how the market participants have been extrapolating events like ISRO Moon mission (see here).

For example, the following three occurrences underline greed's dominance and gradually permeating irrationality in investment decision-making.

1. Recently, one popular finfluencer tweeted a list of some small and micro-cap stocks highlighting that their market cap is less than their current order book. Many of these stocks witnessed heightened buying interest, apparently from small household investors, following the tweet. The message was fervently circulated on other social media, like WhatsApp. I received the message through at least nine forwards from different sources.

All forwards appeared to endorse this seemingly manipulative message. No one on social media questioned the correlation of market cap (or enterprise value) with the order book. No one bothered to highlight the sudden jump in the order book, not substantiated by the overall economic activity. No one bothered to check the margin profile of orders received.

In fact, there are many instances in the market where the stock rises 10-15% just on the news of receipt of an order. One mega-cap company’s stock rose 5% in a day on the back of a news item that the company may have received two orders worth US$4bn from a foreign entity, to be executed over the next five years. The annual execution of this order would be less than 3% of the company’s annual revenue, and the margin profile of the order is still unclear. In the past, such orders have not been too profitable for the company.

2. On August 10, 2023, the Prime Minister, replying to the debate on the no-confidence motion, said in jest that stock market investors should invest in PSUs, which have been criticized by the Opposition parties in the past. Most PSU stocks registered material gains after the PM’s statement (see here). A case in point is the share price of a trading public sector company, which has incurred operating losses in the past four quarters. The share price of this company rose over 80% within three weeks after the PM’s statement.

3. A large reputable brokerage yesterday sought to caution the market by dropping its midcap recommended portfolio. The brokerage noted, “We see limited point in trying to find fundamental reasons behind the steep increase in stock prices of several mid-cap. and small-cap. stocks. There is no meaningful change in the fundamentals of most companies; in fact, they have worsened in many cases. The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months.”

A strategy note released by the brokerage highlighted that “market sentiment is quite exuberant, based on (1) steep increase in the prices of many mid-cap and small-cap stocks; (2) large inflows into mid-cap. and small-cap mutual funds, and (3) huge number of new retail participants in the mid-cap and small-cap funds.”

The small-cap and mid-cap indices recorded strong gains yesterday, mostly ignoring the caution to the wind.

Thursday, March 12, 2020

Solving MSMEs' working capital problem

My numerous interactions with the small traders and manufacturers in past couple of years have highlighted "working capital stress" as one of the key challenge being faced by this key segment of the Indian economy.

Traditionally, this segment had managed their working capital through informal sources. Private pools (popularly known as kitty or committee in local parlance) functioned as economical, stable and sustainable mechanism to fund working capital and small capex needs. Besides, it also helped in providing a large pool of "free" working capital to large corporate buyers.

The process of demonetization in 2016 disrupted this traditional financing mechanism, without offering any alternative solution. This disruption not only impacted the MSME segment, but did also hurt the larger businesses which replied on these MSME as a major source of working capital financing and inventory parking.

In recent past, many government officials and ministers have denied the problem of "delayed payments" and "poor credit availability" to the MSME segment, even though the finance minister has on at least three occasions in past one year promised that all pending payments to the MSME due from government departments and PSUs will be expeditiously cleared. However, no significant delivery on this promise has been seen on the gorund.

Last week, the RBI governor while delivering a lecture at the 15th ASSOCHEM Annual Banking Summit, on the subject "Micro, Small and Medium Enterprises: Challenges and Way Forward" highlighted this problem. Recognizing the importance of MSME in the overall economic context, the governor said as follows:

1. The MSME sector contributes in a significant way to the growth of the Indian economy with a vast network of about 6.3 crore units and a share of around 30 per cent in nominal GDP in 2016-17. The share of the sector in total manufacturing output was even higher at 45 per cent. Taking cognizance of the wider set of benefits that the sector offers to the rest of the economy, the Government has envisioned to increase its contribution to GDP to over 50 per cent in next few years as the country aspires for a ₹ 5 trillion economy."

2. As per the 73rd round of National Sample Survey (NSS) conducted during the period 2015-16, the estimated employment in MSME sector was around 11 crore. Within MSME sector, each of the three sub-sectors, namely, trade, manufacturing and other services accounted for about a third of total employment. Around 50 per cent of the total MSMEs operate in rural areas and provide 45 per cent of total employment.

Interestingly, the micro enterprises account for 97 per cent of total employment in MSME sector. This relates to the problem of what is called the missing middle⁵, which suggests that micro firms have failed to grow into smaller and medium firms and so on over time. This seems to have kept the micro sector bereft of enjoying economies of scale, investment into fixed assets, adoption of technology and innovation.

While counting the challenges for this critical segment of Indian economy, the governor admitted that "delayed payments" is one of the primary challenges being faced by the sector. The governor said, "A large number of MSMEs are ancillary units catering to the needs of large industries, both in the public and private sector. They often face the problem of delayed payments, affecting their cash flow and working capital availability. Most of the time, delay in realisation of such receivables increases their operating cycle and reduces their ability to procure new orders or fulfil the existing ones. A primary survey conducted by Reserve Bank in December 2019 showed that 44 per cent of MSMEs engaged in manufacturing activities faced delay in payments."

The governor mentioned that Trade Receivables Discounting System (TReDS) launched in 2014, could be a sustainable solution for meeting the working capital needs of MSME as well as managing the delayed payment issues. TReDS is primarily an auction based bill discounting platform introduced by RBI. Besides, in the Union Budget 2020-21, the Government has also announced app-based invoice financing products to obviate the problem of delayed payments of MSME. The mechanism may prove complementary to the TReDS platform and would further alleviate the problem of delayed payments.

However, we are yet to see these measures becoming popular with the MSEM and the large corporate and PSUs.

TReDS when (and if) fully adopted, could be a game changing platform in Indian financial services industry. For, it could (a) provide seamless bill discounting facility to MSEM at the most competitive rates, (b) provide a well diversified and cost effective platform to financiers; (c) instill a sense of payment discipline amongst large corporates and PSUs; and (d) help identifying the sign of stress in the corporate buyers at a very early stage, prompting a fast corrective action.

The question is whether all stakeholders are making sufficient efforts to make this happen?

Wednesday, March 11, 2020

Who is accountable for PSUs' conduct

The government of India has been the greatest value destroyer for the investors in Indian Equities. The Nifty PSE index, comprising most listed PSU stocks, now trades at the same level as it was in 2006, implying no return for 13yrs, if we consider point to point investment period.

The CPSE ETF comprising top 22 Central government undertaking stocks, launched in 2014 is giving negative return to its investors.

Many large Public Sector companies are now trading at multi year low prices, adjusted for all dividends and other corporate actions.

The government of India therefore has legal and moral duty to explain to the investors, why it should continue to manage these businesses. They have obviously not managed these great businesses like MTNL BEL, Coal India, etc well and destroyed huge wealth for the nation as a whole and individual investors as well.

The Supreme Court may like to examine, whether the government should be permitted in the first place to raise equity from investors through sale of minority stakes, given that the Constitution of India requires the government to be "Socialist" and not indulge in profit making at the people's expense. Or at least it must consider extending the provisions of the Companies Act relating to oppression of minority shareholders and mismanagement to the listed government companies.

The market regulator must consider bringing the concerned ministers and bureaucrats from the respective operating ministries and departments within the regulatory framework for disclosures and investors protection.

In an unrelated but important matter, the finance minister publically admitted that the RBI and the government were aware of the mismanagement and impropriety issues at Yes Bank since at least 2017. Considering that Yes Bank is a constituent of Nifty and Bank Nifty indices. The National Pension Scheme (NPS) is permitted to make equity investment only in ETFs based on benchmark indices. This means the government deliberately let the money of the subscribers to NPS (mostly government employees and small poor investors) to be invested in Yes Bank at a price of over 300, despite knowing that it is a bad bank. This is a blatant breach of trust, which needs to be investigated and punished.

If the government wants to build clean, accountable and strong corporate and financial systems, it will have to begin the work from itself and show the path to others. The other way round has never worked; it never will.

Thursday, January 16, 2020

Common investors may avoid PSEs for investment

As per media reports the government is seeking huge dividends (Rs190bn) from oil PSUs to meet its fiscal shortfall (see here). It is also reported that some companies might have to borrow money to pay the required amount of dividend as the cash balance with them may not be sufficient to meet the demand. Obviously the payout will at the expense of cutting capex and impairing the future growth potential.

In summer of 2016 also, the "Finance Ministry" had directed all profit making PSUs to use their surplus cash to buy back shares and pay handsome dividend, besides considering issuing bonus shares or going for stock split. (see here) Since then the benchmark Nifty50 has gained over 42%, while the Nifty CPSE has lost over 9%, underperforming the benchmark by massive 51%.

I have said it many time before, and I would like to reiterate this again - for a common investors, finding any reason for investing in a public sector enterprise (PSE) is extremely challenging; notwithstanding whatever government suggests or claims.

From the experience of MTNL, NBCC, Coal India, etc. it is clear that despite their dominant monopoly status, these companies are vulnerable to failure due to policy intervention; simply because the government in India is socialist by the constitutional mandate and an enterprise majorly controlled the government cannot have even profit optimization as its primary objective.

Most of the PSEs in India’s suffer from one or more the following limitations, that makes them unfit for investment by a common investor.

(a) The management lacks transparency and accountability.

(b) The management is corrupt, incompetent and/or instable.

(d) The companies operate under a highly inconsistent policy environment.

(e Many companies do not have control over pricing of their products, which is dictated by the government usually under political considerations.

(f) Some companies like power distributors are often forced to deal will bankrupt customers.

(g) The senior executives are appointed on the basis other than expertise in the area of operation.

(h) Most of the companies may be saddled with excessive bureaucracy without any control over the appointments, promotions and compensation.

(i) Most companies are egalitarian in their operating mission and more often work for social cause rather than optimization of profit.

(j) The companies need political sanctions for managing their capital structure.

Moreover, the ground reality of our economy today is that we are hugely dependent on foreign capital to ensure growth. It is therefore inevitable that government will have to keep relaxing foreign direct investment norms and open more and more areas of the economy to stiff global competition. Under these circumstances, many public sector undertakings with their inefficient capital and wage structure may crumble.

Besides, the majority shareholder (government) has consistently and blatantly oppressed the minority shareholders in these companies – by not allowing them to fix the prices of their products, raise capital when required, make investments where and when desirable and disallowing the managements to restructure their costs (especially employee cost) during downturns.

Under these circumstances, there is little rationale for a common investor to invest in PSEs or CPSE ETF. However, for the professional investors who understand the risk and know how to take advantage of trading cycles, it may be a different ball game altogether.