Will this lead to higher valuations for PSUs?

Fri, 26 Oct Pre-Open

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It was not too long ago when information technology major Infosys was being hounded and criticized by many on its unutilized cash reserves. While the company continued to expand its war chest, the general concern within the investing community was that of the cash earning lower returns than that of the company's core business, thereby lowering the overall return ratios of the company.

On such situations, investor concerns also include misuse of the cash by the company management. Attempts at diversification or expensive buyouts have often earned minority investors a raw deal. Hence the willingness to rather pocket the cash instead of allowing company management to have it at their disposal.

For a while now, the government has been trying to stoke the growth levels in India. This would be benefiting the government by bringing in higher revenues in the form of taxes. However, with PSUs themselves unwilling to spend excess cash towards projects have dislodged the government's original plans. And the reasons for the PSU chiefs not taking the necessary actions seem to be associated with concerns relating policy inactions, lack of resources, amongst others, leading them to wait before committing funds to project that could have an uncertain future.

Government warnings continue... this time in person

The central government had been warning the PSUs against keeping heavy cash idle on their books for too long. On Tuesday, in its first meeting ever, Prime Minister Manmohan Singh met with the heads of India's 25 cash rich PSUs - asking them to invest or pay out the surplus, which is believed to be amounting to a sum of Rs 2.5 trillion. These companies included industry heavyweights such as Oil and Natural Gas Corporation Ltd. (ONGC), Coal India, Bharat Heavy Electricals (BHEL), National Thermal Power Corporation (NTPC), Steel Authority of India (SAIL) and National Mineral Development Corporation (NMDC).

The government's argument seems simple - either help towards reigniting the economic growth and help in changing the investing sentiments in the country or pay the money to the exchequer in the form of dividends. As per the PM, the country should continue to aim for a growth levels in excess of 8% regardless of what is going on around the world.

Addressing the concerns of the PSUs, Heavy industry minister Praful Patel said that a committee would be formed to look into the concerns of PSUs such as autonomy and regulatory clearances, in addition to the investment of surplus funds. Further, the heads of the PSUs also asked for decisions on foreign acquisitions and takeovers being left entirely to the company's board.

How would investors look at this development?

Given the past experience and how regulations have impacted PSU companies, majority of investors would prefer the option of companies paying out the money in the form of dividends. Having said that, how the scenario would change once (and when) the reforms come into place is any one's guess. While the Congress-led ruling coalition has been on a reform overdrive in recent times, it all boils down to execution of the same.