NTPC, a public sector company and the country’s largest power utility saw its investors losing around Rs. 14000 crores in a day a couple of days back, as its share price fell by a steep 11.26 % during the day, thanks to the CERC draft regulations. Also in the news the same day was the investors’ favourite state owned Coal India Ltd, an undisputed leader in producing and supply of non-coking coal in the country, which was slapped a huge fine for abusing its dominance!
Which brings us to the much debated question- Are PSU Stocks really as safe as they are perceived to be? There are various factors which contribute to the “safe and steady long term investment” image which the investors have about stocks of public sector companies –
- The majority government shareholding and its backing and the faith that even if the PSU is in trouble, the government will bail it out.
- Public sector undertakings are less susceptible to frauds and scams and have better corporate governance compared to the private sector organizations.
- Most of the PSUs are fundamentally strong as many of them operate in niche businesses with very few players and high entry barriers and hence are high on profitability.
While the above is true, there is a flip side too in the government holding a controlling stake. In the not so distant past, in an attempt to raise cash, the govt. came out with FPOs or follow on public offers to offload its stake. These FPOs were priced at a significant discount to the prevailing markets prices resulting in the PSU stocks losing value and the investors their money. Also, certain public sector organizations are often obliged to enter into commercially unprofitable deals due to govt. or political pressure, thus taking a hit on their profits.
Summing it up, it is important to understand that every PSU stock doesn’t become a “value “ buy when there is a significant market correction. The company’s fundamentals, financials and the risk factors do matter.