The concept of value is relative. Your idea of value may vary from that of someone else. You may prefer gold, and the other person may see value in silver. You may buy a house in one area while someone else may see value in another area in the same city. Similarly, you may feel the time is right to buy property or stock while someone else may sell the same assets at that time. This difference in the perception of value is perhaps the foundation of a market place.
In the world of investments, the concept of value matters more to buyers than sellers. You need to invest your savings. It is like ploughing a field and then sowing seeds based on the soil, rain and the heat around. Investments grow when the environment around them is conducive. You understand the value of every seed in such a situation.
Just like that, when share prices move up or down, share prices become valuable or moderate. Public sector companies have witnessed share prices tumble or remain weak for a long period of time. Despite this, investors by and large seem to be steering clear of them. It all boils down to the concept of value.
Where you do not see value
Public sector company shares have underperformed those in the private sector for a long time. Over the past two years, the BSE PSU index is down 26 per cent when the benchmark S&P BSE Sensex has gained 16 per cent. Many factors have affected the performance of share prices of public sector companies. The poor performance of shares of the public sector companies is due to the poor day-to-day management and slow processes. Investors like efficiently managed businesses.
While the market sees value in the strategic sale of public sector companies, it does not see value in the sale of loss-making units. There are no takers for them. Air India is a case in point. If you are an investor, why would you buy shares of Air India if that company has losses that run into thousands of crores of rupees?
The government also ends up making profitable public sector companies buy loss-making or smaller ones. While the ownership changes and the government gets the money, it does little to create value for minority shareholders. That is because there is no change in the way those businesses are run.
The government proposes to merge public sector banks into a few large ones. There is already much concern about prospects for the future of public sector banks due to the large quantum of non-performing loans. It is all reflected in the performance of their shares. The NSE Public Sector Banks Index is down 26 per cent in value over the past two years. During the same period, the NSE Private Sector Bank Index rose 9.2 per cent. That shows that the stock market rewards efficiency and quality management. Investors differentiate between well-managed banks and those that are not, when giving market value.
Where can you see value
Over the past two years, India has witnessed demonetisation and implementation of the Goods and Services Tax. The economic growth slowed to 5 per cent in the latest quarter from over 7 per cent. The slowdown in domestic consumption has hurt many industries. The automobile sector, which is dominated by private sector companies, has witnessed a dramatic downturn. This has perhaps pushed people away from some marquee private company shares to low value public sector companies.
The BSE PSU Index over the past one week is up around 1 per cent while the benchmark Sensex is down 1 per cent.
Many government announcements lately are creating some interest and investors see value in picking up public sector company shares. The government has identified Shipping Corporation, Container Corporation and other companies for strategic or asset sales, according to media reports.
The stock market would cheer any plan to bring down the government ownership below 51 per cent in any business. There is much resistance from political organisations to unlocking value by selling ownership or assets of public sector firms. To tackle that, the government could make offers to retail Indian investors only. The government ownership in most profitable PSUs is over 50 per cent. Selling their shares to the public would make them public companies in the real sense.