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Want to invest? This is an opportunity to pick up good PSU stocks

Stock market already showed a positive signal, when the government announced it will be divesting stakes in companies such as BPCL and Container Corporation of India (Concor).

Being an investor, one should always read the current trends and act accordingly. Understanding broad market trends is always important to create a sustainable profit from the market. As the government proposed to privatise some of the public sector undertakings (PSUs), one could observe some actions on this sector in the market. Let us discuss in detail whether it is a good time for investors to look at the PSU segment for investment.

Why privatisation is a buzz word

The government’s proposal to privatise some of the leading PSUs is a major change in its policy and could create huge opportunities for investors. Earlier, the government had been emphasising on divesting PSUs and had also initiated some activities on the same. But now the current government is talking about privatisation of some big PSUs, which could have a greater impact on the broader economy’s performance. Investors could see this as a bold step by the government at a time when the economy is experiencing a severe downturn and revenue collection targets are under stress.

Part of reform agenda

The privatisation push is in line with the government’s reform agenda. The government has been trying to unlock value in PSUs through strategic disinvestment and transfer of management control. What it means is that the government’s equity stake in these companies (which is nothing), but the capital invested by country’s taxpayers, has a better chance to maximise its value. As a country, for a long time we have been following a short-term approach to manage fiscal deficit by selling stakes in PSUs as and when required. This approach of managing budgetary revenue target was followed for a longer period of time and it was somewhat inefficient. Privatisation will help the government in monetising its asset base and also in efficient management of resources.

Identifying momentum segments

There are many good PSU companies in segments such as oil, power, shipping, etc., which are available at a lower valuation for investors. Investors should identify some good PSUs with quality names, enjoying higher return on capital employed and lower leverage but at the same time enjoying higher and consistent profit margins. PSUs with higher free cash flows could be a better choice. Stock market already showed a positive signal, when the government announced it will be divesting stakes in companies such as BPCL and Container Corporation of India (Concor).

How to go about it?

Investors should identify as to who is in control of the affairs of the company, as in the long term a good management team can create value for its investors. Thus, privatisation will fill in the management gaps, unleash capital, and facilitate wealth creation opportunities for investors when the control is with the right management team irrespective of the ownership.

To conclude, one could see momentum in favour of PSU shares and there is a very good chance that ownership change could help companies to become more focused on returns optimisation, which is an essential part for investors.

The writer is a professor of finance & accounting, IIM Tiruchirappalli

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Source: Financial Express