There is no point in your post that one can disagree with. One point which you could have also highlighted is that the GOI keeps periodically destroying price by trying to divest further. Given two businesses with a similar business model, similar financials and similar current market price, one would definitely choose the private sector company over the public sector company.
However, I guess in investments, the issue is also the price which you purchase at, and within price, there is a risk embedded too. Buy at too rich a price, and well, you pay the price. So within this, one needs to figure out whether the PSU’s, as individual companies, and as a group currently have (for all the reasons you outlined above) a price which has very little downside risk to them.
For all the disadvantages PSU’s have, there are also some advantages:
a) Many PSU’s operate in a fixed return environment. Once they pay off their debt, and depreciate their operating assets, they will continue to throw up cash flow from these assets. Examples, NTPC, Power Grid, SJVN
b) Many PSU’s are able to borrow at much cheaper rates, since they have quasi soveriegn status, and can also issue tax free bonds.
c) In case PSU’s get into payment troubles, then the government bails them out-consider the state discom rehab scheme, which has bailed out REC, PFC and so on. The GOI cannot do the same for private sector companies, both from a moral hazard standpoint, and from a “discretion” standpoint. Witness the problems in rescheduling premium payments in the roads sector, as well as the case of OMC’s vs private sector OMC’s.
d) Many regulators have retired PSU staff at the helm. This causes a natural bias in the regulators towards PSUs. Witness the composition of the CERC. Recently, the Director (Finance) of NTPC was made a member of the CERC. Is he really going to work against NTPC interests while giving shape to tariff proposals?
e) In many cases, the government allots natural resources to PSUs, which it wants to give on an auction basis to the private sector. As a result, a company like NMDC has the lowest cost of production of iron ore in the world. They have mines, which will keep producing for several decades. Similarly with Coal India. Recently, SJVN was alloted a coal block. Try to allot a private company a coal block, in today’s environment, even for the most deserving project!!!
f) Many PSU’s give very good dividend yields. In fact the dividend yields on many top notch PSU stock are in the range of 4-7%. Why buy a tax free bond at 8.5% when you can get a dividend yield of 6% and some appreciation every years to the tune of 5-6%?
g) Many PSU’s have rich cash reserves. Take NMDC. Or take Balmer Lawrie. Net of cash on book Balmer Lawrie is available for around 100 Rs./share. The company has an operating Cash profit of around 35 Rs/share.
So with all the disadvantages, there are also several plus points. The question is ultimately one of price. Would I buy an NTPC at 125? Most definitely. Would I buy it at 200? Probably not. Would I buy an NMDC at 135 (with a 15 Rs. dividend waiting in the wings)? Most likely. Would I buy it at the 300 it was at last year. Most certainly not.
I believe that the central government is coming out with an Exchange traded fund, which will own shares of the top 10 PSU’s. This may be one for someone making a general punt. Personally, I would go bottom up for each individual company, and discount a fair price by 50% for government ownership.