The PSU Conundrum

Context:  Along with higher dividend payment, public sector undertakings (PSUs) will now be mandatorily required to outline a plan for non-core asset monetization.

Advantages of asset monetization of PSUs

• Will help generate cash: which can be shared by the government.
• Doesn't need to be shared with the states: Dividend income is a significant component of non-tax revenue for the central government and, unlike tax revenue, it doesn't need to share it with states.

Problems faced by PSUs:

• Squeezing of PSUs for many years:  Over the past five years, a sample of 55 listed PSUs in aggregate paid over 70 % of their profits as a dividend.
• Dilemma faced by PSU: whether they should increase their market capitalization or act as a source to fulfil governments budgetary needs.
  • If PSUs regularly pay higher dividends, they would have so much less to invest, which will affect growth over time.
  • Subpar revenue and profit growth would affect the ability of PSUs to pay dividends.
  • Slower growth and a weaker balance sheet will affect valuations and market capitalization.
• Government interferences: can lead to low valuations of PSU,
  • The interests of minority shareholders are not always aligned with the government of the day.
  • Government intervention and general rules of operations may not always allow PSUs to effectively compete with the private sector.
• Skewed profits: About 70% of profits among PSUs come from sectors, such as petroleum and coal, where private sector presence is negligible also denoting lack of competition.

Conclusion:  The government should give PSUs autonomy and allow them to compete and create value. The best way to increase market value on a sustainable basis is to increase profitability and earnings visibility.