Is the government destroying PSUs?

Wed, 18 Apr Pre-Open

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The government is the biggest beneficiary if its companies work towards creating shareholder wealth. The value of the government's investments in its companies goes up and this enables the government to encash the value as and when it requires money to fund its fiscal gap. The government unfortunately does not see it that way. It believes that its companies are required to fulfill social responsibilities and also help the government in times of need.

There are many instances in which the government has misused public sector undertakings (PSU). Take for example the energy sector which has been the worst hit. The government has suppressed its own companies from growing thereby helping the private sector competitors in the process. The state of the Oil Marketing Companies such as Indian Oil Corporation Ltd. (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) is a case in point. These companies have been on the back foot for over eight years as the government has consistently been lagging in subsidy payments to them. The result of lagged subsidy payments is that these perennially cash starved companies have been forced to abandon capital expansion plans and this has resulted in companies like Reliance and Essar Oil gaining market share.

Another example is of ONGC which has also been used by the government to share the subsidy burden. It is estimated that over the next two years ONGC might end up paying around 39% of the subsidy burden. The recent auction of ONGC shares to fulfill the government's disinvestment agenda is another prime example of government destroying shareholder's wealth.

Apart from energy sector companies, the government is making a mess of coal and power companies also. Take for example Coal India. The government owns 90% of Coal India, which is a hugely cash rich company given its monopoly status. However the monopoly status is the only thing going for the company. Coal India signifies the socialist nature of the government, where coal prices are not passed on to end users and the government is forcing the company into supplying fuel at disadvantageous prices to power producers. The government believes that cheaper coal costs will help power companies produce power at cheaper prices and pass this on to consumers. The fact that power companies will use the cheap coal to increase margins does not figure in the government's plan.

The bottom-line is that ONGC is being used for doling out fuel subsidy while Coal India is being used for giving out power subsidy and these cash rich companies will continue to be used for government's subsidy schemes. The fact that these companies are a monopoly and will continue to make oversize profits will not help shareholders, as the government will make them distribute the profits for social benefits rather than shareholder benefits. Which is why, an investor should keep in mind the role that the government plays in PSU companies and invest his/her money accordingly.