PSU or Public Sector Units are known for… well think about BSNL, MTNL, The Government banks and the only thing you will remember is the bad, sorry, very bad service. So, how did the government stocks perform? And should we invest in those PSU stocks?
Why You Should Not Invest In PSU Stocks In India? The PSU index was higher in 2009 than where it is today in 2019. That means those companies actually destroyed investor wealth. There is no reason why in the coming decade they would perform any better. So, long term investors should just stay away from PSU equity.
The government does not know how to run a business. But having socialist bone, India started companies in every sector. They even nationalized private companies. I am just glad 1991 happened. Otherwise, we would even talk about the stock market. Rather we would be protesting some guy getting too rich. government still uses these organizations to forward their socialist agenda and these are not really good businesses to own. And there is no one reason. These companies do not innovate, they do not care about good product or service.
They do not even care about competition. Any girls father would be really glad if he can find a guy who works in a government organization, mostly because of job security. The unions make sure that the workers every right is protected even if that destroys the company. But, I personally own some PSU stocks. So I have some first-hand experience with these businesses. One thing I would like to tell you if you are not happy being a customer of a company, you should be owning stocks of that company.
But some of these PSUs pay a nice dividend yield. Which is a good tax-free passive income for me? And since these are government companies, with virtual monopoly and no debt to low debt, these businesses will not go bankrupt, so these dividends are mostly secured. Hence I am invested.
But, these are the capital destroyer. The share price barely moves up. You need to time these stocks if you do not want to lose your main capital. But that is possible because of these mostly cyclical commodity stocks. I will try to explain all these in detail below.
How Did The Listed PSU stocks Performed in Last 10 Years?
Here are charts of 61 listed Government companies. And As you can see, in the last 10 years the stock price has barely moved, while the Sensex has more than tripled. The market cap of all these companies has gone down. That means whatever money you invested 10 years back, the capital did not grow. You might have earned some dividends though. And that is pretty good.
There are PSU companies that yield more than saving the account. But the stock market is too volatile. you cannot expect the market to behave as if it is saving account or fixed deposit. For retired and income investors, some government companies offer great dividend though, and as long as those companies are pretty much monopoly the cash flow is guaranteed. And these are government companies, as long as they make a profit, they are not going anywhere.
The above charts are remainders that government companies, especially the retail facing companies are really bad investments. Think about BSNL or any PSU bank you visited lately, what kind of service did you get? Do you feel like going back there? If no, then why do you want to own part of the company? But companies such Indian Oil Corporation, BPCL, ONGC, Coal India or any such companies which have fairly good customer service or monopoly over natural resources – you should definitely look into those companies.
But then commodity prices are extremely cyclical and sensitive to news, so wait for an event or a piece of bad news for a sector and let the price come down – then buy.
Best time to buy the commodity stocks is when the world economy is down, such as now in August 2019. Most of government natural resource mining companies are debt-free and pays a good dividend, which is not consistent. One more experience I want to share, when the global oil price goes down the oil marketing companies such as IOCL and BPCL come down.
You may think ONGC or OIL India should go up since those are primarily upstream companies, but that does not happen either. Since India has a socialist past, market fears the government would introduce subsidiary and that actually makes ONGC and OIL to the tank.
I own ONGC since 2015, so I have witnessed a few cycles already. Now that ONGC owns BPCL, it is both an upstream and downstream company, so the price of the stock does not go up either way. One disclaimer – do not buy any stock based on what I say, I am sharing my observations, you should do your own research to make any decision to buy or sell. If you have any question post it below in the comment section.
Update: I have sold ONGC. I still invest in PSU stocks, I have invested a lot in PTC ltd and SJVN.
Why PSU Stocks Are Wealth Destroyers?
The government does run these companies for profit. Or should I say, these are not-for-profit businesses? These businesses create a job. India needs jobs, Unemployment is a huge problem. These government jobs make sure that the reservation system is kept alive. See, I think the unprivileged one need a reservation, but I think those should be in free education, free healthcare, etc.
But anyway, point being, merit is not the most important factor in government jobs. As a result, the customer experience is horrible.
Service or product, whatever they try to sell, if there is a private-sector competitor, that is always going to win.
I am not sure if these companies care about capital allocation or return on investments, maybe providing jobs is the only focus they have.
Pension is another problem – investors often overlook this expense, but pension expenses is a significant expense that will grow for these companies as the employees retire.
The project never gets completed. I own NHPC for the last few years, they are working on the same projects for the last few years without any ETA. Most of the government company are in the same situation. Think about, how many days your municipality take to fix the local street. Ad a result our investment capital does not grow in value. And these are some issues you need to be mindful about when you want to invest in PSU stocks.
Finally, the debt-ridden government sucks out all cash from these companies, so the end of the year they are left with zero capital for growth. I am not saying government wastes these capitals, they build roads and stuff, and some part they just give away.
Do not ask me who they give the money to, but I will tell you one thing, the answer will vary based on whom you ask this question.
Which PSU businesses I personally own and why?
I do not own any PSU banks. I do not see those as businesses. Those are retail shops with extremely poor customer service where the government distributes money, of course, the government gets the money from the taxpayer. All PSU banks are certified wealth destroyers.
I own National Aluminium, ONGC, SJVN and NHPC. NALCO is a debt-free company. The stock price will never go up, but it gives out a good dividend. Heavily linked with alumina price.
NHPC and SJVN are good dividend payer. They produce electricity from water. They do not have any magic. They just produce hydroelectric. And I am not sure if that is going to work in 20 years, as all our rivers are drying up anyway.
The good thing is these businesses are spreading in some consulting, solar and wind power, although those are a tiny part of their portfolio. They have a good amount of debt in their books, but all other utility companies do.
I own ONGC for more than 4 years now. While the stock price does not fail to disappoint me every day, the dividend makes me smile a couple of times every year. This is a cash cow. The government made it buy BPCL and like any rebel BPCL simply refused to identify ONGC as it’s daddy, I mean promoter, for a while. But, there is no bull case for ONGC.
The oil price goes up and the fear of subsidy brings down the price. Other time the falling oil price is good enough to bring down the price. But they are talking about doubling the gas and oil production by 2030. If everything goes well I expect them to reach the target by 2050. Hopefully, the stock price will go up too. Till then be happy with the 4% dividend yield.
I have a small number of shares in GAIL, NBCC EIL too. But I do not have much experience with these stocks as I purchased them just last month.
Update: While I am not a big time PSU bull, but I do invest in PSU stocks. I have sold NALCO, GAIL, NBCC, ONGC. But I have double downed on PTC Ltd, SJVN, Coal India.
Always do your own research before you buy or sell any stock, I am not your advisor and giving you any advice might be illegal for me. So, i shared what I do and did not tell you what you should do. Well, you understand what I mean, don’t you?