The cheap valuations of several large-cap. private and PSU stocks underscore the market’s disinterest in certain ‘value’ stocks even as the same market is prepared to pay super-rich multiples for ‘quality’ stocks.
The low valuations of many large-cap private and PSU stocks suggest that the market is not excited about their prospects. However, it would appear that even their majority shareholders (promoters) have an indifferent view of the valuations as most have hardly made any attempts to address the market’s concerns (real or perceived). This is quite odd as the companies/promoters will require the support of capital markets given their funding and leverage issues.
The cheap valuations of several large-cap. private and PSU stocks underscore the market’s disinterest in certain ‘value’ stocks even as the same market is prepared to pay super-rich multiples for ‘quality’ stocks. We attribute the lack of interest to (1) ESG-related concerns and (2) nature of the businesses (global commodity businesses for example). Companies can do little about the nature of their businesses but the benefits of the right ESG practices should be obvious to the majority shareholders of all companies irrespective of their underlying businesses. Hence, we are quite puzzled by the approach of the companies.
Continuous de-rating over time
We note that the valuations of the ‘value’ category of stocks have gone from fair to inexpensive to super-cheap over time. However, the majority shareholders and companies have done little to engage with minority shareholders to reverse the ‘downgrades’. This is even more puzzling as several of these companies or their majority shareholders will require the support of capital markets to raise (1) new capital to fund expansions or acquisitions; several operate in capital-intensive businesses, (2) new capital to deleverage balance sheets; several operate in deep cyclical businesses and (3) funds for the government’s divestment programme.
We would assume that all owners would desire higher shareholder wealth although we have wondered about it at times given the shenanigans of certain companies. For the PSUs, the government has to refocus its priorities—(1) continued majority ownership in the companies with low potential divestment revenues or (2) privatisation of the companies to raise much larger amounts of funds to fulfill bigger objectives. For the private companies, the majority shareholders/managements may want to engage with minority shareholders on ESG concerns or even look at selling their companies to realize the right value for all shareholders.
Govt’s rethink of divestment
The market will view any review of current divestment methodology favorably. It sees continued government ownership as a negative from a governance standpoint, as the current process has not resulted in better governance of the companies. The government is reportedly exploring strategic sale of certain PSUs.
We believe it should not restrict strategic sale to loss making ones only but extend it to profitable PSUs too. Lastly, it may simply want to bring down its ownership to below 50% by divestment to institutional and retail investors. In fact, an exclusive sale to retail investors only will puncture any employee or political opposition to such stake sales; after all Indian citizens and taxpayers are the ultimate owners of the PSUs.
Edited extracts from Kotak Institutional Equities Research report.