About 100 public sector undertakings (PSUs) saw their collective market caps falling maximum by 21% from about Rs 25 lakh crore as on January 23, 2018, to Rs 19.82 lakh crore on last Friday. Of course, bad assets of the banks and frauds in a couple of jewellery companies led to some significant erosion in the market cap of PSUs. The spike in oil prices also hit state oil marketing companies. However, many efficiently run the PSUs also saw steep erosion in their market caps in the last few months. For example, two consistently profit-making PSUs in the defence space saw their market cap evaporating 50-58% from their 52-week highs. Two best performing public sector banks (PSBs), in terms of quality of assets, business growth and valuation, saw their stock prices crashing about 40% in the short span of time.

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Apart from spiking NPAs of PSBs and default of jewellery companies, what led to such a massive fall was the overall fear of retail investors in the PSU stocks after the news of a defence PSU cutting down the profit margins on the government orders. This fear got aggravated after the government proposed to amalgamate three PSBs. The market belief that the bad banks (in terms of elevated NPAs and net outstanding NPAs being higher than financial net worth) would get a better valuation than relatively better performing PSBs led to a massive fall in the stock prices of quality PSBs.

The government should allow the listed PSUs including banks to run on economic rationale on par with private entrepreneurship for mergers as well as for customer-vendor relationships. The government, which executed some bold economic reform measures like GST and FDI in insurance, shouldn’t deviate from the path of free-market forces while handling the PSUs. Otherwise, the bitter memory of public investors’ wealth erosion in the PSU stocks would become permanent. The same would impact the divestment plans of the government and resource mobilisation of PSUs. Let us not forget the fact that a lot of financial resources of retail investors got allocated to the PSU stocks through ETFs and also through a mutual fund, apart from direct investments.

By, G Chokkalingam
(The writer is founder and MD, Equinomics Research and Advisory)

Source: DNA Money