{"id":1161,"date":"2020-07-11T22:43:00","date_gmt":"2020-07-11T22:43:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1161"},"modified":"2020-07-11T22:43:00","modified_gmt":"2020-07-11T22:43:00","slug":"indian-public-sector-undertakings-psus-pride-or-prejudice","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1161","title":{"rendered":"Indian Public Sector Undertakings (PSUs): Pride or Prejudice"},"content":{"rendered":"
\n<\/p>\n
\n(Stocks covered: RITES Ltd, Bharat electronics Ltd, BEML Ltd, HAL, CONCOR, ELGI Equiments Ltd, Laurus labs, Sasken Tech)<\/span><\/div>\n
\n<\/div>\n
Ignorance is the biggest
\nhindrance to growth but still the good thing about ignorance is that it itself
\ndoes not pose as a hindrance\u2026it does not obstruct the path on its own. And
\nthat\u2019s exactly why Prejudice is most dangerous because it can mislead to wrong
\npath while the traveller is assured of righteous which eliminates the chance of a course correction. Wrong path is more destructive than no path. And so we can
\nsee that religion is not marred by ignorance but prejudice. Most of our wrong
\nchoices and mistakes are not out of ignorance but prejudice.<\/div>\n
<\/div>\n
\n<\/div>\n
Here, I remember when IPO of one
\nof the defense PSUs, Bharat Dynamics Ltd was launched. At that time a message degrading
\nR&D capability of BDL was doing the rounds that India’s premier missile
\nmanufacturer spends as much on research as our hair oil company Marico. The
\nmessage said that for 3 years period 2015\/16\/17 Marico spent some 80 cr on
\nR&D while BDL spent just 85 cr. That message also came to me. But I told
\nthem to stop spreading nonsense. Why nonsense? Because PSU defense companies
\nlike BDL, BEL, HAL etc. do not do the major R&D work for their products. It
\nis DRDO who spends money on R&D as per Govt. budget allocation (Ministry of
\nDefense. However ISRO reports to PMO, which is busy in all other works so does
\nnot interfere much and that\u2019s why ISRO has much freedom and much advanced
\nR&D system). DRDO has established these PSU\u2019s painstakingly and over
\ndecades. Like BDL was founded by some 60-70 scientists of DRDO in 1969.<\/div>\n
<\/div>\n
\nSo DRDO does the major R&D on
\nbehalf of these PSU\u2019s. DRDO develops the foundation technology and then the
\nfinal manufacturing is done by these defense PSU\u2019s. Just like DRDO developed
\nthe Akash missile’s foundational technologies then BDL and BEL are doing the
\nmanufacturing of this. So one needs to add the R&D done by DRDO before
\narriving at misleading conclusions.<\/div>\n
\n<\/div>\n
\nIndian PSU\u2019s are often ridiculed
\nand blamed for being inefficient, lethargic, living on government support and
\ndevoid of any energy. Indian PSU stocks trade at extremely lower levels as
\ncompared to their private counterparts. Talks are there always to sell them to
\nprivate sector in order to make them \u201cbetter\u201d. Government is also planning massive
\ndisinvestment process of these PSUs.<\/div>\n
\n<\/div>\n
\nBut are these PSUs really that inefficient?<\/div>\n
\n<\/div>\n
\nA) R&D
\ninvestments are the basic mantra for economic growth<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nRecently I was talking to an
\nanalyst about investing into PSU stocks like BEL, Rites. He told me that these PSUs
\nare useless as they lacked terribly in innovation. Then I asked him whether he
\nknew the share of R&D in India by private sector. He answered in negative.
\nI told him to give a ballpark figure keeping in view his high regard for
\nprivate sector. He said that that should be the highest. But I told him that
\nthings are actually in reverse. Private sector investment in R&D is the
\nlowest in India at 37% against a global average of 71%. Most of the R&D
\n(63%) in India is still being done by government sector where central Govt. has
\n45.4% share, PSU has 4.6%, State govt. has 6.4% and Higher education sector
\n6.8%. So, central Govt\/PSUs have 50% share of Indian R&D expenditure which
\nis massive. However, Govt. share in R&D in US is 10%, in China it is 15%,
\nCanada\/UK 7%, Korea 11%. Our State governments need much work to do here but this
\nalso shows that there is a tradeoff between wasteful subsidies and innovation.
\nIn Govt\/public sector, DRDO has maximum share of 31.6% of R&D expenditure
\nfollowed by Department of space (DOS) (19.0%).<\/div>\n
\n<\/div>\n
\nIndia lacks badly in R&D and
\nwe spent 0.7% of its GDP on R&D in 2017-18. Most of the developed countries
\nspent more than 2% of their GDP on R&D like the US (2.8), China (2.1),
\nIsrael (4.3) and Korea (4.2). Our spending is around .7% for almost two decades
\nnow. This is one of the reasons for the dismal growth of our industries in last
\ndecade or so. We were\/are not good enough to compete at global levels. That\u2019s
\nwhy in spite of being one of the biggest markets of smartphone not a single
\ncomponent of smartphone is manufactured in India. Our consumer electronics
\ngoods industry is fully under the control of global giants and Indian players
\nare reduced to fringe players.<\/div>\n
\n<\/div>\n
\nFurther, most of the R&D in
\nprivate sector is done by drug\/pharmaceuticals and transportation\/auto sectors\u2026around
\n50%. Tata motor (around 4000 cr) is the big gun here and in fact at 99th<\/sup>
\nplace it is the only Indian in top 100 global spenders in R&D and if we add
\nR&D of JLR (some 15000 cr) then Tata motor is at 13th<\/sup> place. You will be surprised to know that defense PSU giant Bharat Electronics Ltd. spends around 9% of its turnover on R&D!!! Its top-line is 12000 cr. <\/b><\/span>Further,
\nforeign firms also account for major chunk of R&D being done in India which
\nis included in this 37% share of private sector. And if we look further deeply
\ninto R&D done by our private sector we can see that the focus is mostly on
\nprocess or incremental innovation to reduce the cost or improving the
\nefficiency\u2026the focus is never on breakthrough product. That\u2019s why though we
\nspend quite a bit in Pharma but still we just export low cost generic medicines
\nand compete on the basis of cost and as other countries like Philippines are
\nalso upping the ante in generics so the sailing is getting tougher for Indian
\ngeneric players. Our manufacturing exports include low margin high volume
\nproducts like refined petroleum, cotton, leather goods etc. There is no Indian
\nbrand in manufacturing at global level.\n<\/div>\n
\n<\/div>\n
\na) R&D
\nwork by Indian defense organizations<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nOn the contrary, look at the
\nachievements of ISRO in space technology which has catapulted it into being one
\nof the biggest commercial players in the space industry globally. ISRO has
\ndeveloped space technologies almost scratch in India as no other country is
\nwilling to share highly sophisticated and premium space technology. Apart from
\nbuilding these from scratch, ISRO has done the same at extremely low cost.
\nThese low cost but premium products will pave the way for ISRO to achieve grand
\nsuccess commercially across the globe. ISRO\u2019s Mangalyaan mission cost $74
\nmillion (500 cr) against $671 million spent by the NASA on similar missions.
\nThe cost was lower than the cost of Hollywood blockbuster movie Gravity.
\nSimilarly, Chandrayaan-2 mission last year cost around Rs 978 crore. Though
\nthere is a difference in the tenure of the missions of NASA and ISRO and
\nshouldn\u2019t be compared one to one but still they are way cheaper and the main
\naim was not to spend longer time at Mars or Moon but to demonstrate\/test the
\ntechnical ability to reach there. In the future, we will see more advanced,
\nmission critical and complex missions to space.<\/div>\n
\n<\/div>\n
\n<\/a><\/div>\n
\nSome people think that low cost
\nis due to low cost of engineers and scientists in India. But this is not the
\ncase. Space missions involve thousands of hi-tech critical components
\nwhere there is no scope for failure. Sourcing these components from other
\ncountries would have been very costly so ISRO marched towards the tough part of
\ndeveloping these locally. And while doing so, ISRO has created and promoted
\nmany private players who have supplied these components to ISRO at fraction of
\ncost of importing it. ISRO built the technology and the same was licensed to
\nprivate players who then did the manufacturing.<\/div>\n
\n<\/div>\n
\n<\/div>\n
\nSimilarly, our Navy has also done
\nquite a work in R&D and India is almost self-sufficient in manufacturing
\nHi-tech super critical navy ships required by Indian navy. In Missiles, DRDO
\nhas done a great work and we are almost self-sufficient in missile technology.
\nRecently, Brahmos missile (joint venture with Russia) has been a grand success
\nstory of DRDO which is being touted as one of the best globally. <\/span>It is capable of travelling at speeds of up
\nto Mach 3.0 (three times the speed of sound, around 3400 KMPH) and it travels
\nat low altitudes so it is very difficult to be detected by radars. China is extremely worried over BrahMos because these are not even detected by S-400 missile defense
\nsystems china is procuring from Russia. Just before hitting its target, BrahMos
\nperforms `S-manoeuvre\u2019 to evade any anti-missile defence system which makes it
\nvery deadly. The high speed gives it enormous kinetic energy which can rip
\napart even large warships. In case of a short swift war with China, India can
\nwreak havoc at Chinese military infrastructure, radar and air defense systems. <\/span>India is planning to sell these to Vietnam
\n& Philippines which has made china extremely worried because it knows that
\nit has no answer to these missiles. <\/div>\n
\n<\/div>\n
\n<\/a><\/div>\n
\nSurface to Air Akash missile was developed
\nby DRDO and manufacturing was taken by defense PSUs BDL (Bharat dynamics Ltd)
\nand BEL (Bharat electronics Ltd) and both have also engaged private players
\nlike Tata and L&T for critical components like missile launchers and almost
\n300 other small private players for smaller components. Akash has a kill
\nprobability of 88 per cent for the first missile and 99 per cent for the
\nsecond. Almost 90% of Akash missile components\/cost are made in India.<\/div>\n
\n<\/div>\n
\n<\/div>\n
\n<\/a><\/div>\n
\n<\/div>\n
\nRecently, DRDO has developed
\nSeeker technology and used the same on BrahMos missiles successfully and this
\nwill lead to the savings of around 15000-20000 cr as the same are imported
\nright now and this comprises some 30-35% of the cost of a missile. Seeker
\ntechnology equips a missile to hit its target with pinpoint accuracy and this
\ntechnology is a closely guarded secret so local development is a great
\nachievement. There is already demand for both these missiles from other
\ncountries and very soon we\u2019ll see India securing large export orders for both
\nthese.<\/div>\n
\n<\/div>\n
\n<\/div>\n
\nPeople in India try to ridicule
\nHindustan Aeronautics Ltd (HAL) for huge delay in making India\u2019s first Light
\ncombat aircraft (LCA) \u201cTejas\u201d. But delay was mainly caused by regular changing of
\nspecifications\/requirements by IAF. We don\u2019t always need the best technology in
\nthe world. We need better technology than the rivals. The best way to promote
\nlocalization is to create a basic product which can serve most of our needs and
\nthen we can make incremental improvements in it over the period of time. In
\ncase of Tejas, the responsibility of making incremental improvements should
\nhave been given to IAF. Similar model is used by Indian Navy and this is one of
\nthe reasons of success of local manufacturing in Navy.<\/div>\n
\n<\/div>\n
\nTejas LCA was meant as a
\nreplacement for ageing MIG-21 and it was to fight against Pakistan\u2019s JF-17
\n(supplied by China). And Tejas is a better aircraft than MIG-21 in all respect.
\nLike, I was reading that Tejas has a tighter turn radius of 350 metres, smaller
\nthan F-16 which helps in dogfight. And F-16 is better than JF-17 anytime. Tejas
\nhave an advanced autopilot feature that automatically pulls up Tejas if it is
\ngoing down too fast and crossed the danger line of altitude and this makes
\nTejas one of the safest fighter aircraft. JF-17 don’t have such features. In
\ncase if engine failure, Tejas has a parachute feature to regain control or
\nminimize casualty. In the absence of these safety features, 3 JF-17 have
\nalready been crashed. JF-17 was poised to compete against Tejas in Lima-2019 Aerospace
\nExhibition and also at Bahrain International Airshow to woo the potential
\ncustomers but at the last moment JF-17 had pulled out both times.<\/div>\n
\n<\/div>\n
\nIndia has very large defense
\nbudget and it is clear that we have no other option but to focus on local
\nprocurements. This no option may be the thrust India needs to focus within
\nIndia. If India wants to be a significant player in defense export market then
\nfirst of all these products should be used by Indian army itself. Like, a
\nnumber of countries has shown willingness for Tejas but unless the same is used
\nby IAF other countries will also be apprehensive. Tejas should be used and
\ntested first by IAF improving\/rectify it further before offering it for
\nexports.<\/div>\n
\n<\/div>\n
\n<\/a><\/div>\n
\nTejas has used General Electric
\nF404 engine and its radar system has been procured from Israel. But still a
\nfighter aircraft is not just about engine alone. Engine costs some 25% of the
\ntotal cost of a fighter aircraft. But other critical components have been
\ndeveloped locally in India like fuselage, landing gear, AESA radar, control
\nsystem, networking, sensors, weapon management system, braking system, oxygen generator
\nand many other subsystems. Aeronautical Development Agency (ADA) undertook the design
\nwork on Tejas with zero previous experience but still they did a great work.
\nADA had used advanced technology at every opportunity-advanced computational
\nfluid dynamics for the aerodynamic design, a mock-up designed for the first
\ntime in India entirely on the computer, advanced carbon fibre composite
\nmaterial for the structure, advanced avionics in the cockpit. India is also
\nworking on developing indigenous Kaveri engine to replace GE F404 engine in the
\nfuture upgraded versions of Tejas and it will take another 2 years or so.<\/p>\n

Just remember that these defense
\nproducts developed by our defense organizations are one of the most complex,
\nsophisticated and strategic products which are critical to the national
\nsecurity of a nation. They involve very complex and highest levels of technology
\nand expertise\u2026much higher than any other industrial product (our regular cars,
\nmachines etc.). And our defense organizations are making complete products not
\njust components. And if other countries are showing interest in procuring these
\n(deals are at final stages) then that shows that our defense organizations have
\nbeen successful in developing globally acceptable high quality\/strategic
\nproduct while our private sector firms have not achieved much success in
\nproducing globally accepted premium quality industrial products.<\/p>\n

\n<\/div>\n<\/div>\n
\n<\/div>\n
\n<\/div>\n
\nb) Government
\nR&D investments have done better<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nSo as we can see from above,
\nGovt. R&D investments have produced great results in developing niche high
\ntech critical technologies in space and defense. On the contrary, if we can see
\nthe R&D efforts of private sector in IT services, Pharma and Auto sectors
\nwhich comprise the major chunk of R&D investments-the focus is never on
\nbreakthrough technology development. Our IT sector survives on low cost of
\nhighly skilled professionals. In spite of so much talent we could never
\ndeveloped\/created an IT product like Java, Oracle. In Auto sector, R&D
\nefforts are mainly driven by the need of the hour due to stiff competition from
\nglobal giants. Our behemoth Reliance industries spends just .5% of its topline
\non R&D. Somehow, the focus is not on innovation though there are valid
\nreasons for this. Like in medicine, tight control over pricing of the medicine
\npush away the investments in developing new breakthrough medicines because
\ndeveloping a new cure costs billions.<\/div>\n
\n<\/div>\n
\nI
\nhave seen people talking about PSUs that they had been formed to create
\nemployment in the country. But employment was just the secondary objective. The
\nmain aim behind the creation of PSUs was to develop critical technologies in
\nheavy industries and strategic\/core sectors for self-reliance. Due to focus on
\ndeveloping high end technologies after independence, India was ahead of most of
\nother developing countries. <\/span>But then we lost the track in developing and
\nfurther modernizing these technologies. Private sector was playing the role of
\nassistant to Govt. in core sectors. Non-core sector
\nwas left for private sector but private sector was content in having monopoly
\nconditions in protected market and this hit us very badly in product
\ndevelopment. When our economy was opened, global hi-tech players just threw our
\nlocal manufacturers into the dust.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nAfter the onslaught of global
\ngiants, when private manufacturers were crushed but heavy industries PSU like BHEL
\nstill managed to hold their forte. BHEL is in power sector producing top
\nquality power equipments which are powering India for almost 60 years. Power plants
\nconstructed by BHEL are running smoothly even beyond their useful life all over
\nIndia that too when Indian coal has very high ash content but BHEL was able to
\ndevelop technology to handle this issue efficiently. BHEL
\nstill is one of the biggest R&D spenders in the country; it spent 750 cr in
\n2017-18 (820 cr in 2018-19) which is 2.7% of its turnover and it was at 10th<\/sup>
\nplace in India. Our Auto maker Maruti spent 1.1% of its topline on R&D.<\/span>
\nThe fortunes of BHEL in recent years were hit hard due to the entry of cheap
\nChinese players in power sector and focus on solar power from thermal due to
\npollution woes. Chinese players have inferior power products but they dented
\nthe market due to low cost which is due to the fact that Chinese players get
\nbig export subsidies, low tax and interest rates while BHEL has to fight with
\nhigher tax and interest rates. This was something which should not have been
\nallowed to happen at the cost of local players. We can\u2019t allow foreign players
\nto capture our market by undercutting. They should compete on merit. <\/div>\n
\n<\/div>\n
\n<\/a><\/div>\n
\n(Image BHEL: Gas Turbine)<\/span>
\n
<\/span>
\nIt is
\nworthwhile to mention that in 2018-19 BHEL secured 97 patents in India which
\nwas the highest for an Indian company. It is noteworthy that BHEL earned this
\nin the presence of our IT giants like TCS\/Infosys. <\/span>Though global chip
\nmaker Qualcomm was the leader with 405 patents followed by BASF with 232
\npatents granted, Tata group was at 3rd<\/sup> place with 211 patents. In
\n2018-19, apart from Tata, BHEL was the only Indian firm in the top 20 patent
\nwinners in india. At present, BHEL is working on to develop technology for
\ngeneration of methanol from high ash Indian coal.<\/p>\n

As shared earlier Defense PSU giant Bharat Electronics Ltd. spends around 9% of its turnover on R&D!!! Its topline is 12000 cr.Another PSU BEML has spent 3.4% (104 cr) of its turnover on R&D in 2019-20.<\/span><\/b>
\n
<\/span><\/b>
\n<\/p>\n

\nOne of the reasons for lower
\nsuccess of make in India in defense is the stiff technical specifications (GSRQ)
\nby Indian Army while procuring defense products which is difficult for the likes
\nof DRDO, Defense PSU, Ordnance factories and private sector. Now there are
\ncalls from ministry to lower down these specifications so as to promote local
\nproducts because we don\u2019t need advanced products like US as we are not fighting
\nwars across the globe. We are to guard our borders so we need to focus on our
\nrequirements. Army\/Defense sector can do improvements on these later on. Similar
\nmodel was followed by China and many other countries to grow local defense
\nindustry.<\/div>\n
\n<\/div>\n
\nTurther, Govt undertakings operate under
\nthe eyes of CAG, CBI and CVC (called 3Cs) which limit their freedom and risk
\ntaking ability otherwise they can do even better. These agencies question every
\ndecision taken by PSUs, so even in R&D they are forced to avoid taking high
\nrisks on breakthrough innovations due to fear of failure and questioning from
\nthese 3Cs. In fact, in order to free these PSUs from the eyes of 3Cs, govt.
\nwants to bring down the ownership in these PSUs below 51% (though there is
\nissue regarding the meaning of \u201cControl\u201d). <\/div>\n
\n<\/div>\n
\nRecently, India has secured an
\nexport order (300 cr) of Weapon locating radar (WLR) from Armenia competing against
\ndefense power-house Russia and Poland. WLR has been developed by DRDO and BEL.
\nNow India is looking at other markets for this as India has edge because of
\nlower price with more or same specifications. So far India shied away from
\ndefense export markets due to geopolitical issues but now government is looking
\nat export market very seriously. <\/div>\n

<\/div>\n

\n<\/div>\n
\nWe
\ncan see that apart from investing much higher in R&D as compared to private
\nsector (Indian companies only) Govt. sector has been able to create and develop
\nmore innovative products and technologies. In other words, their return
\nquotient or innovation index is much better than private firms.<\/span><\/div>\n
\n
<\/span>
\n<\/p>\n
\nc) Net
\nprofit is a wrong measure to evaluate the contribution of PSUs to economic
\ngrowth<\/u><\/span><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\n
\nI have seen many attempts to evaluate PSUs by comparing their performances (Profit & Loss account) with private sector counterparts and straightforward conclusions are derived fairly easily just on the basis of profit & loss statement. But great thing about life is that it is multidimensional (not just 3D). Net profit is just one dimension of multi-dimensional growth matrix and this growth matrix becomes more complex when we raise the platform from micro level (Firm level) to macro level (Economy level).<\/div>\n
\n<\/div>\n
\nGrowth (profit) for a corporate firm is an individual (linear) phenomenon while for the economy the same is a comprehensive (inclusive) phenomenon. Actually GDP is a composition phenomenon but GDP growth is a distribution phenomenon. Economic growth occurs when wealth is distributed. That\u2019s why when a private bank like ICICI decides to close a loss making remote town branch (or decides not to open a branch) then this will increase their profits but when SBI opens a branch in a remote town\/village then it does hit their profits but it results in economic growth (wealth creation). Another way to see this opening of a bank branch by SBI is that it distributes income (wealth) from SBI to village in the form of investments in Branch (assets\/employees) which results in further growth of wealth (Because village as a whole also grows due to availability of banking… result is the higher production and so economic growth). So loss to SBI is an investment for the economy.<\/span> Hence, net profit is a very inefficient barometer to measure growth at macro level (economy) just like GDP which is good enough to measure \u201cIncome generated in an economy\u201d but not \u201cwealth\u201d created.<\/p>\n<\/div>\n
\nI have seen SBI branches in remotest places in India and so it is not appropriate to compare SBI to other private sector banks just on the basis of net profit. Once I was posted in a small town in MP (Sarni) and there was no other mobile services working properly (no tower) except BSNL and BSNL broadband internet was a pleasant surprise for me when dongles of other providers were too slow. So value of PSUs can\u2019t be judged on the basis of net profits but their contribution to economic growth which I think is massive. Like PSUs are required to procure around 25% of their procurements from MSME vendors so this process may result in higher costs and execution delays but the impact of economic growth is much higher in the form of development of these MSMEs and employment generated through these MSMEs. We can see PSUs are distributing their wealth more comprehensively. Concentration of wealth in the hands of few is not good for an economy. It has to be distributed. Socio-economic impact of PSUs is very high.<\/div>\n
\n<\/div>\n
\nLike, the role and importance of Indian railway can\u2019t be gauged from profit and loss account alone. Now, as private players will be allowed to run passenger trains so they can choose profitable routes thus maximizing profits. So there is a much higher purpose behind PSUs and if these can be made better then they can provide massive boost to economic growth. As they are dealing with public money so there are processes, checks and control measures to avoid any willful mishap like fraud etc. So there are tendering norms (against selective buying), L1 norms for awarding contracts, regulatory agencies like CAG, CBI and CVC etc. This is to ensure the fulfillment of objectives and to stop the misuse of power and public money. So these checks and controls can make PSUs bulky and slow moving at times but safeguarding of public money is also equally important. The need is to choose a midway to allow more freedom.<\/div>\n
\n<\/div>\n
\nThat\u2019s why private firms are more nimble and a firm like Reliance can source crude oil at spot market to get the benefit of big temporary fall in prices but state owned refineries like IOCL are required to issue tenders for the same. This is one of the reason for Reliance to have high GRM (It has highest Nelson Complexity Index for its refineries; Recently IOCL\u2019s Paradip refinery is having high NCI. Then Reliance\u2019s refineries are near coast saving money, big size). But now as controls\/managements are getting better so state owned refineries are also allowed to source crude at spot prices. Recently IOCL has set up a trading desk in Delhi to source cheap crude at spot prices just like Reliance. IOCL\/HPCL\/BPCL are setting up a massive refinery (60MT almost double of Reliance\u2019s biggest) at west coast.<\/div>\n
\n<\/div>\n
\nBut there is a risk with the concentration of power\/agility in a thundering juggernaut like Reliance. Fraudulent managements can siphon off the shareholder\u2019s wealth by taking dubious decisions thus leaking out the money. We have seen many examples recently in the cases of Vijay Mallaya, Yes bank, DHFL, Videocon, IL&FS. So there was a purpose behind CAG and CVC to have an eye on the working of PSUs and this acts as a check against these destructive frauds though this has a cost on PSUs in the form of bulkiness. We can\u2019t afford a Videocon, Satyam in critical sector like defense. But still there are better ways to ensure more freedom for better agility (which I\u2019ll discuss in a separate post in more details) by empowering their managements\u2026like Singapore\u2019s Temasek Holdings which acts as Investment company where portfolio companies are managed by their independent boards. Tamasek can independent business decisions and Singapore govt has no role in it. . However, in any case the RISKS of existence threatening frauds are much lower in PSUs.<\/div>\n
\n<\/div>\n
\nAnd if you ask me then these lesser risks should lower the cost of equity capital of a PSU just like bulkiness may raise the cost of equity (At times I find calculations of cost of equity somewhat funny and not much worthy in practical life\u2026but still a fair theoretical concept to understand the factors making a firm more risky than the other.)<\/div>\n
\n<\/div>\n
\nPSU is not an Indian concept and they are still used globally for achieving socio-economic goals. In fact, State owned enterprises (SOE) have played major role in the stunning economic growth of China. Government is required to invest in sectors which are strategic for the nation long term growth and safety like Defence, Energy, Mining etc. Government is required to play a major role in high risk sectors where private sector has lesser appetite for risk like take for example Semiconductor, AI, advanced telecommunication tech etc. Govt. has access to cheap capital and it can afford to take risks much better. Indian private sector has failed to capture and develop the massive opportunities in sectors like Solar power, Electronics goods, Semiconductor, telecom equipment and so now it is better if Govt. (through PSUs) invests in creating these capacities in India. I\u2019ll discuss more on Govt. investments in these sectors in a separate post on development of semiconductor industry in India.<\/span><\/div>\n


<\/div>\n<\/div>\n

\nd) Private
\nsector\u2019s big failure in developing products for global markets<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nIn the absence of R&D
\ninvestments, our private sector has chosen the easy way of having technical
\ncollaboration with global players on license or royalty basis. Due to this
\nlicensing of technologies, they can only focus on Indian markets. Notable case
\nis our battery makers Exide Industries and Amara Raja- You can see them forging
\ntechnical collaborations or JVs with foreign partners for Indian markets only.
\nThey still do not have their own technology. They have brand and distribution
\nstrengths in tough Indian market which forces global players to enter into
\npartnerships with them which was not the case with electronics goods like TVs,
\nsmartphones etc. and global players just captured the Indian market fully as
\nthey ventured to create their own brand promotion and distribution clout.<\/div>\n
\n<\/div>\n
\nThis inability of our private
\nsector to focus on developing hi-tech top quality products for Indian and
\nglobal markets is the reason that our manufacturing sector is stagnant at 17%
\nof our GDP for almost a decade. Further, due to this our merchandise exports
\nare also stagnant for last 10 years or so. India can\u2019t survive in the highly
\ncompetitive export market with low cost alone because many new countries like
\nBangladesh (in textile), Philippines (in generics) are coming to capture market
\nfrom India as in low value added products their cost structure is still lower
\nthan India. Selling tea and cotton in global market is not a big deal as there
\nis very low value addition so entry barriers are very low.<\/div>\n
\n<\/div>\n
\nIndian private players have so
\nfar failed to build \u201cproducts\u201d with strong \u201cBrands\u201d for global markets. Because
\nthe focus is not on developing product as they are content in being a component
\nsupplier to global players. For India to be a global power, we need to focus on
\nproducts. Just make a look at all the listed Indian companies in stock market
\nand try to find a player with strong global product\/brand. You may not find
\nmany.<\/div>\n
\nBut still there are success
\nstories like Mahindra tractors. You can see Mahindra tractors (Swaraj Brand)
\nroaring in American fields. American farmers are very quality and brand conscious
\nand this is indeed a big achievement by Mahindra. But we need many more like
\nthis.<\/div>\n
\n<\/div>\n
\nHere
\nI want to mention another such Indian company which I like very much. The name
\nis ELGI Equipments Ltd which I think is the first Indian premium global brand
\nin capital equipment space-air compressor. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nThe
\nlikes of Bharat forge are great but they are just component suppliers to
\nforeign producers. But ELGI has chosen the tough path of developing branded product in
\nB2B segment that too in premium segment, creating manufacturing facilities in
\nUS\/Italy etc. It has very strong brand recall and it is seventh largest player
\nglobally and in the last 10-12 years ELGI has increased export share in its
\nturnover (around 2000 cr) to 50% which is a great feat and it will grow further
\ndue to the launch of innovative products like oil free compressors at almost
\nthe same cost of an oil-lubricated one. In Indian market, ELGI is a closed
\nsecond to global giants like Atlas copco and Ingersoll Rand. ELGI spent around
\n4% of turnover on R&D in 2018-19 (it was 3.4% in 2017-18) which is quite
\ngood by any standards and this is the reason it has maintained the edge and
\npremium-ness in its products. On the contrary, once a formidable force Kirloskar
\nPneumetic spends just 1% on R&D. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nThe Kirloskars
\nare here for decades but they faltered big time on growth. Once they were the
\nleading industrialists in India competing with the mighty Reliance\/Tatas but
\nthey just could not find the right path. They were the very first in focusing
\non product approach and they did a great job in developing hi-tech technologies
\nlocally. They were way ahead of other generic industrialists of India with
\ntheir focus on brand power and globally competitive products. Their brand
\nstrength is such that people in Africa uses \u201cKirloskar\u201d word for Pumps\u2026they
\nbelieve that meaning of Kirloskar is pump. Shantanurao Kirloskar was the
\nvisionary behind the spectacular growth of the group. He was the one of very
\nfew Indian businessmen like Tatas who treated their employees like a family. He
\nwas man behind the formation of the Federation of Indian Chamber of Commerce
\n& Industries (FICCI) in 1927. But still, the good thing about the group is
\nthat they are almost debt free and some restructuring here and there may
\ncatapult them back to growth as an Indian leader in manufacturing. I really
\nwant them to do great and I am looking to pick stocks like Kirloskar brothers
\nand Kirloskar electric.<\/span><\/div>\n
\n
<\/span><\/div>\n
\n<\/a><\/div>\n
\nELGI
\nis a premium player with very premium product offerings. They never tried to be
\na low end low quality player. They have matched their product quality with the
\nbest in the globe and this is one of the reasons for their success in highly
\nquality conscious export market like US. ELGI is now investing big for branding
\nand taking part in trade shows across the globe. Air compressors are ubiquitous
\nbecause every factory need needs compressed air, and therefore a
\ncompressor-whether it is mining, food processing, medicine, railway braking,
\npetrol pumps\u2026everywhere. Recently, ELGI has launched its AB (Always Better)
\nseries at the Hannover industrial fair is one of the mainstay of its strategy
\nin global success. ELGI has invested 5 years in developing this and these
\nproducts have the potential to revolutionize the business. The global oil-free
\nair compressor market will grow much faster due to environmental impact of
\noil-lubricated air compressors. Also, the industries like food and
\npharmaceuticals only use the oil-free ones.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nI
\nthink this one to be the major beneficiary of coming expected growth of manufacturing
\nin india and current problems faced by Chinese players across the globe.
\nCapital investments were low in India in the last 2-3 years but this will pick
\nup pace as most of the economy cleanup (NPAs) has been over and India is
\nlooking big at local manufacturing. ELGI may get more market share as many weak
\nplayers will leave the market due to covid crisis. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nIts
\nprofits this year have been fallen but there is more to the story. Actually
\nELGI is expanding in newer markets in Europe and it is investing for creating marketing
\nand supply chain infrastructure from the scratch rather than acquiring the
\nexisting distributors which is very costly. It has acquired some in the past
\nthough in other markets. So they are building a team of 70 people whose salary cost is hitting
\nNP along with other fixed costs by some 40 cr (will hit for next 3-4 years).
\nThen some costs they incurred in India this year won’t be happening in
\nfuture…some 10 cr or so. Their employee cost is up by 60 cr to 400 cr in
\n2019-20 from 340 cr. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut i
\nlike companies taking pain in building a premium brand. Brand strength and
\ncustomer loyalty in B2B segment is much stronger than B2C. ELGI is taking great
\npain, efforts and investments in building a great premium Indian industrial
\nbrand. Good dividend player…low debt…good cash in the books. ELGI was in
\ninvestment mode so far and I believe its current earning profile is not
\nreflecting the true potential because this one is going to reap the benefits of
\ninvestments in superior product quality and distribution across the globe. <\/span>I have started adding this one from 140
\nrecently and will add more of in the future.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSimilarly, I remember when I
\npicked pharma giant Biocon few years ago at 40 (Click here for earlier post on Biocon)<\/a>. My main reason for investing
\nwas its very superior R&D focus. At that time many analysts were negative
\non this one but Biocon was my only pick in Pharma sector and it has delivered
\nbig time so far- 10 times returns so far as it is trading at 400 now. I am
\nstill holding it. Last 3-4 years were very bad for Indian generic pharma
\nplayers due to competition in low entry barrier generics but Biocon is one of
\nthe very few which has given great returns. Biocon was in complex generics and
\nat present the biggest player in very complex bio-similar segment which
\nrequires very high investments in R&D as compared to small molecule
\ngenerics. After Biocon, now I have picked Laurus labs as the next pharma high
\ngrowth candidate which is another stunning player with very superior R&D
\ncapabilities in manufacturing complex APIs. During covid market fall I added
\ngood chunk of my portfolio in it around 300-330 and it is already touching 600.
\nBut still a worthy candidate for any portfolio.<\/div>\n
\n<\/div>\n
\ne) Whether
\nIndia\u2019s R&D Intensity ratio of .7% is really that poor?<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nIndia spends some .7% of its GDP
\non R&D which is considered very low by global standards. But I think more
\nthan the absolute amount we fared badly even in getting the most out of these
\nR&D (.7%) investments. We fare worse in Innovation quotient or innovation
\nrank. This is due to faulty (or risk averse) approach to innovation. Most of
\nthe Private sector\u2019s R&D investments are in Pharma and Auto sector where
\ndue to the nature of business (faster technology changes, regulatory and global
\ncompetition) they are \u201cforced\u201d to invest in R&D otherwise they would have
\nbeen content in doing run of the mill business churning out low tech low
\nquality mas products for local market. Like, in Pharma R&D investments are
\ninto reverse engineering a medicine for producing the generic version which is
\nless risky but very less innovative.<\/div>\n
\n<\/div>\n
\nFurther, I think R&D
\nIntensity ratio (calculated as total R&D investments divided by total GDP,
\nwhich is .7% for India, 2.8% for US, 4.3% for Israel\/Korea) does not render
\nmuch information about the innovation potential of a country just like overall
\nGDP figures do not provide any information about the quality of national income
\n(sustainable, promoted with high debt or investments or consumption). Actually,
\nR&D investments are directed by the nature of industries an economy
\nprimarily deals with like an economy which is primarily based on tourism will
\nhave very low R&D Investments because the share of other industries are
\nsmaller as compared to tourism. But still, it is possible that in those
\nindustries they were doing some breakthrough innovations. That\u2019s why observed
\nR&D intensity ratio is greatly impacted by the composition of industries in
\na particular economy like if we take the case of South Korea which invests big
\nin R&D but this is due to the nature of industries it is operating in. Korea
\nis a big force in ICT (Information and communications technology) industry
\nwhich an R&D intensive sector. Similarly a country can be a force in low
\nR&D intensive industries like chemicals.<\/div>\n
\n<\/div>\n
\nAnd so if we account for the
\nindustry structures of an economy along with standalone R&D intensity then
\nthe resultant modified R&D Intensity gives different results. Standalone
\nhigh R&D intensity economies like South korea and Finland are ranked much
\nlower when their industrial structure is accounted for. It simply means that
\nthey are average in industry agnostic innovation index. They do not spend much
\non R&D unless they are forced to due to industry specific dynamics. This,
\nhowever, can\u2019t take away the stunning performance of R&D of these countries
\nin ICT industry.<\/div>\n
\n<\/div>\n
\nIn
\nthe absence of industry specific R&D requirements, R&D investments are
\ngoverned by perceived high returns for R&D work or innovations. And that\u2019s
\nwhy the countries like US are ranked much higher in Innovation as compared to
\ntheir overall R&D intensity. This is due the fact that innovators see high
\nreturns for their innovations in US (due to favorable regulatory environment as
\nI have mentioned earlier about tight price control on medicine pricing in India
\ndiscourages R&D investments). Further, countries like US have vast market
\nsize for products which increases the revenue potential of any breakthrough
\ninnovation. Also, Govt in US provides highly supportive environment for R&D
\ninvestments which reduce the cost of doing R&D. All these factors result
\ninto higher propensity to invest in R&D which is not affected by the nature
\nof a particular industry.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nStrategy&, a business unit
\nwithin Price Waterhouse Coopers is publishing an annual report of the top 1000
\nmost innovative companies in the world for over 12 years. So far, it has found
\nno statistically significant relationship between R&D spending and
\nsustained financial performance. Strategy& has found that the top 10 most
\ninnovative companies are rarely the top 10 spenders on R&D.<\/div>\n
\n<\/div>\n
\nSo when we account for the industry
\ncomposition of Indian economy then this .7% R&D investment may not look
\nthat poor. Like, manufacturing is around 16% of Indian economy which is lower
\nas compared to other countries like China\/Korea having almost 30% share of GDP.
\nBut as Indian manufacturing does not involve high R&D intensive industries
\nlike ICT so this figure is not low in itself. Also Agriculture accounts for
\nsome 16% share of GDP in India which is just 1% in US (although the size is
\nvery large in US) but Indian agriculture is very backward with very low farm
\nsizes. Low farm size forces farmers to avoid using innovative
\nproducts\/machinery and this is one of the biggest hindrances in the growth of
\nIndian agriculture and R&D investments. So when
\nwe account for these factors we can see that R&D intensity rate is not that
\nbad; our Govt. just needs to create a rewarding environment for R&D and
\nInnovation so that people are motivated to try novel ideas.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nIndia is a preferred location for
\nglobal giants for captive R&D investments due to low salaries for highly
\nqualified engineers and research professionals. Like in integrated circuit (IC)
\ndesigns, India has great capabilities and many MNCs have established their IC
\ndesign research centers in India but most of the work done in India is transferred
\nto other countries where manufacturing of ICT products is done. But off late,
\nstartup culture is growing big in India and many Indian startups have developed
\nsome great innovative products but most of them are acquired by global giants
\nwhich now are seeing Indian startups as some sort of R&D outsourcing. Many
\nof Indian startups in Chip designing have been acquired by global giants like
\nQualcomm. But still due to recent focus on startups and innovations, India has
\nimproved its ranking in Global Innovation Index from 81 to 52 between 2015 and
\n2019. <\/div>\n
\n<\/div>\n
\n<\/a><\/div>\n
\nMany Indian startups are doing great work in manufacturing fabless semiconductor chips in India like Cirel Systems, Signalchip, Mymo Wireless, Saankhya Labs etc. Some like Mymo are in fact making 5G products.<\/div>\n
\n<\/div>\n
\n
<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\n<\/div>\n
\n
<\/span><\/b><\/div>\n
\nB) PSUs are best
\nsuited for Investments by Government for economic growth<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\n
\n<\/div>\n

India was and still is a poor
\ncountry with large population which means that availability of private capital
\nfor investment will be risk averse and costly. In poor economies, demand supply
\nequations are erratic and supply may not be able to create the demand making
\nprivate capital apprehensive to invest in such variable scenarios. Fewer
\ninvestments mean less income generation and so low demand which makes this a
\nclassic chicken-egg dilemma. This is where government has to take the lead role
\nin making investments because government can arrange capital much cheaper and
\ncan also impact the demand scenario with its efforts\/schemes.<\/p>\n

After witnessing satisfactory growth in last 10-15 years, now India needs large investments for
\ntaking the economy towards next leg of growth. In last two decades, IT services
\nand Pharma sectors played the major role in economic growth as they brought
\nhuge amount of wealth to India through exports. Auto sector has also grown big
\nbut it is not in \u201cIncome generation\u201d but in consumption of generated income. In
\nagriculture, we are yet to realize our true potential\u2026production is increased
\nbut not the income of the farmers. In this period, we have done a grave mistake
\nin ignoring the very important sectors like electronics goods and telecom which
\nare very large and getting very important strategically. IT\/Pharma sectors are
\nmatured now and they itself are looking for next growth catalysts and for that
\nthey are also required to make big investments (like in R&D). Our Auto
\nsector is also stagnant now\u2026its next leg of growth will come either from
\nexports (only options is low cost Car Africa) or high growth in other sectors
\nin India apart from IT\/Pharma. So without any second thought we need to invest
\nmore locally. As of now, investments are some 28% of our economy while the rest
\nis consumption and government spending. China is around 42% and it is having
\nthis share for quite a long time and this is where India needs big improvement.
\nOur Investments touched some 40% around 2010-11 but keeping in view the size of
\nour country and population we need to take this figure to high forties for
\nlonger periods of time. Right now our investments are more or less equal to
\ndeveloped countries.<\/p><\/div>\n

\n<\/div>\n
\nAnd so the question is- from
\nwhere these investments will come? First of all, let me tell you all that
\ncheaper and easy credit is the first pre-requisite for investment growth in an
\neconomy. As of now, private sector has not impressed that much at all in last
\ndecade or so. Just look at the quantum of NPAs in sectors like power, steel and
\nother infrastructure like road etc. There is no doubt that most of these NPAs
\nare not strategic mistakes but willful frauds. Then, private sector has avoided
\ntaking high risks in investing into much needed sectors like semiconductors,
\nelectronics goods. They have opted for less risky avenues like infrastructure
\nlike power plants\/roads to have long term revenue contracts. If we can see they
\nhave just tried to replace government firms like NTPC here who are already
\ndoing good job for long time. In these infrastructure related sectors there are
\nless execution risks (though fraud risks are huge). <\/div>\n
\n<\/div>\n
\nWhy risks are less in infra? I
\nhave explained the same in my previous Blogpost related to Value investing that
\ninfra debt is less risky. Debt and infrastructure are made for each other\u2026made
\nin heaven. The loans taken by normal business entities like Telecom, FMCG,
\nSteel, chemicals are more risky than infra loans because there is tough
\ncompetition in these industries and often it is happening that two competitors
\nare fighting hard for same business\/market share with loans and as we can guess
\none is going to bite the dust and his loans will turn NPA i.e. the fight we are
\nseeing in telecom now. So debt to normal businesses is very dangerous and
\nrequires high skills in allocation of debt. If one particular sector is already
\nhaving high debt and chances of demand in that sector may go down or there may
\nbe severe competition and price war coming so in that case caution is required
\nin allocating loans to that sector.<\/div>\n
\n<\/div>\n
\nBut Infra is different. Due to
\ncompetition and miscalculations by businesses, we can create excess (redundant)
\ncapacity in steel sector but can we lay extra gas pipeline of 5000 KM length??
\nCan we make another road parallel to a newly constructed road?? Can we make an
\nadditional Airport or another power plant without long term PPA? So as we can
\nsee there is hardly any scope for redundancy in infra and if properly planned
\n(like costs during bid stage) then chances of failure are very less in Infra.
\nThat\u2019s why I feel there should be low chances of NPA in infra but it needs
\nlower interest rates. <\/span>So in my view
\ngovernment should have motivated private sector to invest in other import heavy
\nsectors like ICT and energy.<\/div>\n
\n<\/div>\n
\na) Better
\nto choose change in management style and land sale than disinvestment<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nBut you can\u2019t expect private
\nsector to take big risks in investing into high risk ICT sectors with high
\ninterest rates, weak government policies in promoting local products. And this
\nis where I think PSUs have much greater role to play. The calls for
\ndisinvestments of PSUs are made citing weak and inefficient management though I
\nhave shown that this is just a misconception. But still, if there is a need to
\nfurther strengthen the board and management of these PSUs then I do not think
\ndisinvestment is the only option. Let\u2019s make management of these PSUs independent
\nwith government just playing the role of a strategic and majority
\nshareholder\/investor only with no interference in the management like in the
\ncase of Maruti Suzuki JV for manufacture of cars in India where Suzuki was
\nhaving the majority of the management control for running the firm which was a
\nbig success. Management decoupling is much easier then selling these highly
\nprofitable PSUs cheaply. This is just like selling the family gold and this
\ndisinvestment is not an infinite source of funding but if government can make
\nthese PSUs better and more profitable in partnership with private sector then
\nit can reap the benefits in the form of higher dividends\/taxes forever. Also,
\nwith the grand success of ISRO globally there should be no doubt about the
\nefficiency of government owned and operated firms.<\/div>\n
\n<\/div>\n
\nFurther, most of PSUs have large
\nvaluable land holding across India. In my view it is much easier and better for
\nthe government to sell these land holdings rather than selling these PSUs.
\nBelieve me, land sale alone can generate gigantic sums. Once, I was reading
\nthat BSNL (biggest PSU loss maker) has done the valuations of 1\/3rd<\/sup>
\nof its prime land holdings and the same was some 65000 cr!!! Can you imagine it
\nwas just 1\/3rd<\/sup>. Same is the case with BEL, BEML, HAL, BHEL, Railways,
\nNew India Assurance and many more others.<\/div>\n
\n<\/div>\n
\nb) PSUs
\nas investment vehicles for directing the economy<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nMost importantly, government can
\ncontrol its investment target for pumping up the economy much better with these
\nPSUs. Like, when there is a confidence crisis in an economy then it becomes
\nvery difficult to induce private sector to invest in the economy even with low
\ntax and interest rates. We are facing the same situation right now in India.
\nConfidence of the businessmen and consumers is the biggest driving force behind
\nany economic growth. Take the example of Solar power manufacturing- India is a
\nbig importer of solar power components but we can\u2019t afford to build huge solar
\ncapacity on imports. This will destroy our economy and in that case thermal
\npower is better for us. So now, India needs investments into solar energy
\nmanufacturing. So far, it has not happened\u2026may be due to any reason. But
\ngovernment can\u2019t force private industry to invest for solar energy. However, it
\ncan ask the likes of BHEL and BEL to invest for the manufacturing of silicon
\nwafer in India. Both have the required expertise to do the same efficiently.<\/div>\n
\n<\/div>\n
\nc) India
\nneeds large investments in semiconductor industry<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nIndia needs huge investments in
\nsemiconductor and electronics goods industry because they are the biggest
\nimports now and we are not in a position to let this happen for a long time
\nfrom hereon as the demand for these are growing very fast (fastest growing
\nsegment). Some halfhearted efforts have been done by government to promote the
\nlocal manufacturing but they are a big failure. I think here the best option is
\nto have a public private partnership. The likes of BHEL and BEL are best suited
\nfor this role as they have the expertise for electronics. BHEL is already
\nmaking silicon wafers for solar panels for ISRO\u2026though not on large scale but
\nstill they have the knowledge. BEL is also having the expertise in chip design.
\nSo both BEL and BHEL coming together and in partnerships with a private player
\nis the way to go. <\/div>\n
\n<\/div>\n
\nRecently Indian government has
\nannounced 3 incentive schemes for promoting the manufacture of electronics
\ngoods in India which somehow went unnoticed by media. I think more promotion of
\nthese schemes is required across media platforms. Taiwan is the largest chip
\nmanufacturer in the world (its TSMC is the global giant) and then Samsung
\n(south Korea) is the next. Both countries have friendly relations with India
\nand I think there is no doubt that our Government should welcome them to create
\nfacilities in India in partnership with Indian firms or on technology transfer
\nbasis. Taiwan is facing tough time in its manufacturing facilities in China due
\nto ongoing US-China cold war and US is pressing it to leave china and to invest
\nin US. So Taiwan has valid reasons to invest in world\u2019s next biggest market for
\nsemiconductors.<\/div>\n
\n<\/div>\n
\nThen, India already has a great
\nchip design talent and a number of startups have developed great innovative
\nfabless chips. Chip design is the first step in the entire chip fabrication and
\nit is very complex part. Chip manufacturing requires huge upfront capital
\ninvestments. So there are increasing numbers of firms which are Fabless-means
\nthey do everything related to chip but not the chip manufacturing, they design
\nand sell the hardware but don\u2019t do the manufacturing of silicon wafers.
\nQualcomm is the global fabless giant and others are Broadcomm, AMD, and Nvidia-they
\nare all from US. In many instances, Indian fabless startups were acquired by
\nthese global giants. Here, I think there is a need for PSUs to make strategic
\ninvestments in these startups which will promote R&D in India and these
\nimportant technologies will remain with India. PSUs have large amounts of cash
\nin its books like BEL has some 4000-5000 cr cash and it spends big on chips for its
\nproducts. Hence the likes of BEL should promote startups in this sector.
\nRecently, BEL and Wipro have developed a system on chip (SoC) that can be used
\nfor civil applications such as tablets and mobile phones.<\/div>\n
\n<\/div>\n
\nNow is the time for India to get
\nbig on semiconductor industry in India and it is good that Indian government is
\ntaking some right steps in announcing incentives schemes for manufacturing and
\ninvestments in India. I will be explaining this sector in much detail in
\nanother post related to this sector.
\n
<\/span>
\nAs of now I have made small
\ninvestment in Sasken technologies (invested at 480) which I think can do
\nsomething big in fabless chip manufacturing sector growth in India. Sasken was
\none of the very few in India to focus on product development (IP based) in IT
\nrather than focusing on run of the mill low value third party software
\nservices. It was among very few Indian IT companies who invested for R&D
\nfor IP developments in communications sector and still holds 70 valuable
\npatents. Semiconductor and telecom are its major revenue sources. They have
\ngood capabilities in Chip design and hardware design and I like it as it is a
\npure play on Chip\/semiconductor sector as other large IT players have small contribution
\nfrom this sector. They used to be major supplier of IT Product to Nokia phones
\nbut then Nokia lost the race in smartphones and then another big customer the
\nnetwork equipment maker Nortel collapsed. So they were in reconstruction mode
\nand done some real transformation. But amid all this transformation they have
\nmaintained their normal run rate of cash generation and avoided useless
\nspending on acquisitions<\/span><\/span><\/p>\n
\n. <\/span><\/div>\n
\nAfter the restructuring, apart
\nfrom chip design and semiconductor Sasken is focusing on IOT,
\nvehicle-to-vehicle communication, 5G, Telecommunication and satellite
\ncommunication, machine learning and consumer electronics. Major customers of Sasken include Intel,
\nQualcomm, Intel, British Telecom, Honeywell, Sony, Inmarsat, Harman, Motorola
\nSolutions, Texas Instruments, GE etc. In Fabless chip manufacturing, Sasken
\nworks for third party Fabless manufacturers like Qualcomm and it has the
\ncapability to develop entire product from the scratch like it has designed and
\ndeveloped satellite phones for Inmarsat from end to end. Sasken\u2019s chip design
\nRecently in Jan-2020 it has been selected by Taiwan Fabless giant Mediatek for
\nits IOT programme for AI-enabled semiconductor chipsets. Recently it has
\npartnered with Qualcomm for auto sector to support their customers in the
\nadoption of the \u2018Qualcomm Snapdragon Automotive Cockpit\u2019 platform and \u2018Qualcomm
\nAutomotive Wireless Solutions\u2019. Sasken has partnered with Qualcomm and Mediatek
\nfor around 15 years and its products are used in their chips.<\/span><\/div>\n
\n<\/div>\n
\nGood management\u2026regular dividend
\npayer\u2026normal dividend yield is 3-4% but it distributes big special dividends
\nquite regularly which shows the willingness of the management to share the
\nwealth with shareholders. Last year they paid Rs. 35 as special dividend. They
\ndid the same by paying Rs. 25 as special dividend in 2016 and in 2014 and 2015
\nthey paid Rs. 20 & 25. Most importantly, even now they have cash of 340 cr
\nagainst market cap of 700 cr. So with 50% cash holdings and PE of 7-8 makes it
\nvery cheap and worthy of investments. CMP 480.<\/span><\/span><\/div>\n
\n<\/div>\n<\/div>\n
\nC) In stock
\nmarket investing, management integrity > Ability<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nNow, finally coming to investment
\nin PSU stocks where I have seen all sorts of weird theories for not investing
\nin PSU stocks. And if you ask me- in most cases these PSU stocks have not
\nperformed well only due to these weird theories itself not otherwise. But let
\nme remind you the biggest risk in stock investment. It is not the execution
\nrisk (the company doesn\u2019t perform well) of the management but the risk of
\nhaving a fraudulent management which will wipe out all the wealth in a single stroke.
\nWe have seen the cases of satyam, DHFL, Videocon, Geetanjali etc. where fraud
\nmanagement destroy everything. Worst part is that management integrity risk is
\nmost difficult to judge or analyse. I always say that I am not worried at all
\nwhen my stock does not performed well due to industry level crisis because an
\nable management will be able to sail through difficult times. But there is no
\nremedy or hope when management itself wants to steal the shareholder\u2019s share of
\nwealth.<\/div>\n
\n<\/div>\n
\nI have seen our so called great
\nanalysts assigning low valuations to management skills of the PSU firms (which
\nI have proved wrong) but they never assign high comparative valuations to
\nmanagement integrity and honesty of the PSUs which will even out any valuation
\ndifference. Just compare the likes of Anil agarwal of Vedanta Ltd with PSU
\nmining giants like NMDC. Anil agarwal was always having dubious credentials but
\nrecently the board of Vedanta is facing the criticism for going for the
\ndelisting of Vedanta ltd at very cheap price. Price offered by the board is 88
\nvs some 200 book value. Delisting is not wrong but management must pay fair
\nprice to the shareholder and not being opportunistic during market mayhem.
\nWhether the final bid price made by shareholders is high or not but the low
\nprice asked by management says a lot about the integrity of the management. And
\nthese types of managements can wipe out the wealth in a single master stroke
\nand for the bad luck of Indian investors there are a lot of such types of
\ndubious stocks lurking around in our stock market.<\/div>\n
\n<\/div>\n
\nJust compare the same with NMDC
\nwhich always tried its best to help the tribal dislocated due to mining while
\nVedanta is always under criticism for destroying the local tribes and
\nenvironment. <\/div>\n
\n<\/div>\n
\nThat day I was checking Advanced
\nenzymes technologies. I can\u2019t say that its management is not honest but still
\nsome actions raise the doubts and this makes the final decision making very difficult. I liked it during IPO time but made an exit last
\nyear at 220. Somehow the vibes were not that comforting. And when we have
\nnegative vibes without any reason then we have to dig very deeper in the books
\nof accounts to find the red flags. They earned some 350-370 cr in last 3-4
\nyears and after putting some 100-120 cr in assets they have some 200 cr
\ncash…but dividends are just like peanuts and they are buying companies
\noutside India. So i have seen that these acquisitions are typical signs of
\nmoney leaking out so i think this requires much deeper investigations…not
\nanalysis like who is the promoter\/shareholder of acquired companies, what is
\nthe value addition to its business, how much goodwill they have paid for the
\nsame and whether they have acquired just an asset or a business for which
\ngoodwill paid can be justified?? In their books their net assets are 200 cr but
\ngoodwill is 300 cr!! Just for a perspective, their goodwill in 2016 just before
\nIPO was 171 cr (it was revised to 220 cr in 2018 AR, don’t know why) and this
\nhas been increased to 300 cr after IPO while revenue is increased to 440 cr
\nfrom 300 cr while the assets have been doubled. So my only worry is the doubts
\non the intention of the management. They have done the IPO and i was also very
\npositive on the business but management could not prove their will to share the
\nwealth with shareholders. I may be wrong but this happens with a lot of IPO
\nstocks.<\/div>\n
\n<\/div>\n
\nThen, there is Parag Milk. I
\nliked Parag due to its focus on Cheese business because Milk is a very tough
\nbusiness and there is no product differentiation exists among all the milky
\nwarriors. But as I consider IPO’s from unknown people risky so I refrained from
\ninvesting large sum in it. Somehow I lost my trust in its management because they
\ntalk so much…always talking…launching so many products when there is no
\nneed as they should focus on Cheese and whey protein only. So it may appear
\nthat with so much noise they may be suppressing the cries of some wound. Their
\nforay into too many products and brands is what irks me the most. Cheese,
\nprotein supplement, premium milk, mango drink- all this is getting too much as
\nthese all have huge working capital requirements apart from large spends on branding.
\nIt has bad debts which are far higher as compared to other market players\/industry
\nnorms. They have much higher bad debt provisions which cast doubts on their
\ntopline\/business strategy. Then there is export subsidy issue which comprises
\nthe biggest chunk of their bottom line. Though these issues can also be a sign
\nof management inefficiency, not necessarily a crooked management. But if we
\nlook at them launching so many products along with other red flags then the
\nstory looks dubious. But still Parag is a very strange case. I have seen many
\njunk companies like sanwaria, Manpasand beverages and it was very easy decision
\nto discard them as junk because their cooked financials are easily exposed as
\ntheir products were not visible in the market which is the conclusive evidence
\nthat their topline is fake. But Parag i have seen the products
\neverywhere…even this January when i was in Punjab i found its products
\navailable everywhere though i was thinking that it is just a western India
\nplayer. But still, not getting comfortable I made an exit at loss and put the
\nmoney in other stocks like TV18 and Clariant where I recovered my losses quite
\nearly.<\/p>\n

But i am not saying that both Parag and Advanced enzymes are not trustworthy…just want to share that these types of actions raise the doubts and we need to be extremely careful in ignoring all the business prospectus, historical performances and financial soundness.<\/span><\/div>\n

\n
<\/span><\/div>\n
\nSo if you ask me then this integrity
\n& honesty factor of PSUs should be valued much higher.<\/span><\/div>\n
\n<\/div>\n
\nD) Some great
\nPSU stocks for investments<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nI have invested quite a bit in
\nPSU stocks. So I am just sharing my views in brief on some of the best PSU
\nstocks. I will explain these in much detail in some other blog posts.<\/div>\n
\n<\/div>\n
\nRites Ltd (CMP 255, market
\ncap 6300 cr):<\/u><\/b> Indian needs massive investments in its infrastructure if it wants to capture next leg of strong economic growth. Railway Infrastructure is the missing link so far and thankfully India has realized this and massive investments are being made in Dedicated freight corridors and Metro projects across the nation. So Railway is the next big investment theme for next 10 years or so and there is not any better name than Rites Ltd. Consultancy is its mainstay as of now which is a high
\nentry barrier business. Rites is just among the best globally. It wins most of
\nits bids by competitive bidding. I have seen many instances when Rites had to
\nbe inducted subsequently when MNC consultant failed to deliver on time. But its
\nconsultancy work is not about writing a story…it acts as General consultant
\nwhere it undertakes the entire work starting from engineering design, location,
\ntendering, vendor selection\/evaluation, quality control and timely execution.
\nIt is highly technical work. Their domain expertise and knowledge is very
\ncritical for minimum cost variations and timely completion with quality
\nstandards. Their role is very crucial as they have to prepare the cost
\nestimates and on that basis the bidding is to be done. RITES has been providing
\nservices to Indian Railways\/Transportation sector and now to Defence. These
\nprojects are quite complex with very few agencies are having capability to
\nexecute such projects in India.<\/div>\n
\n<\/div>\n
\nIts number of employees is same
\nin last 10 years…some 3100-3200 but revenue per employee is increased from 21
\nlac to some 70 lac which i think could even beat the best in IT sector. So what
\nwe have now- High entry barrier business with high margins, trading at low PE ratio of 8-9, Profit almost 650
\ncr (i see this touching 1000 cr in next 2 years), ROE is 25%, dividend yield around 6% which i think will easily touch 10% in
\nnear future. Cash in the books is around 1400 cr. It does not need to spend big
\non capital assets so it has big operating leverage which means in the most of
\nthe top-line growth will generate more free cash flows which means much higher
\ndividends. It is the nominated agency for exports of railway products like
\nLocomotives of Indian Railways which is again low capital high margin business
\nand which will grow big. Same is the case with leasing business which will grow
\nbig due to dedicated freight corridor and coming privatization in passenger
\ntrains.<\/div>\n
\n<\/div>\n
\nBharat Electronics Ltd. (
\nCMP 99, Market cap 24000 cr)<\/u>: <\/b>I picked this one around 30 (Click here for old post on BEL)<\/a>. <\/b>For me this is the proxy for Indian
\ndefense sector. I liked all defense stocks like BDL, HAL etc. But BEL
\nundertakes the work from all of them including Midhani and ISRO so I decided to
\ninvest only in it. Midhani I also own from 100. Another thing which I like
\nabout it is that it has fairly large non-defense business where I am seeing
\nhigh growth. As of now defense segment is around 80% of its turnover but the share of non-defense is growing much faster and it is investing in R&D for non-defense products.
\nIt has some 900 acres of land in prime locations of Bangalore.
\nRecently HAL has sold some land in the similar area around Rs. 30 cr per acre
\nwhich value the land bank of BEL at some 27000 cr when its market cap itself is
\nat 24000 cr !!! This is one stock where I have invested quite a large chunk of
\nmy portfolio and during covid market meltdown I started picking it at 60-65 and
\nrecently made buying at 90. It spends staggering 9% of its turnover on R&D. <\/span>Its turnover this year is 12000 cr and has an order book of 52000 cr. Almost 96% of its turnover is from products developed through in house R&D. <\/span>Dividend yield is around 4% with around 4000-5000 cr
\ncash in books. It trades at a PE of 13 which is low if we look at its high ROE of 20%, High cash in books, massive order book, strong focus on R&D, high share of locally developed products, growing share of non-defense revenue and exports…it deserves minimum PE of 20. One of the best pick in Indian defense sector.<\/span>\n<\/div>\n
\n<\/div>\n
\nBEML ( CMP 636, Market cap
\n2600 cr)<\/u>: <\/b>I like it because <\/b>BEML has significant presence in
\nMetro rail car manufacturing in India\u2026.50% local share. BEML was the first
\nIndian firm (still the only indian) to start manufacturing of highly complex
\nmetro cars in India. For Metro rail cars, in next 5 years, demand will be for
\nsome 25000 cr in and 70000 cr in next 10 years. 75% is to be procured locally
\nso BEML is going to get great business. Then export market is the next thing.
\nThe cost of a coach is around INR 9 cr in India while it is around 15 cr across
\nthe globe. BEML\u2019s local content in Metro is 65%. Titagarh also has presence
\nthrough its Italian firm. I also hold this at avg of 40.<\/div>\n
\n<\/div>\n
\nI see significant economic
\nmeasures to be taken by Indian govt on chinese presence in India and chinese
\nhave secured large orders in Indian metro. I can\u2019t say about the fate of
\nexisting orders but new orders will be difficult for them. Plus BEML has one of
\nthe best in defense in India. Its mining equipment division will also see high
\ngrowth after a slow period as mining leases are renewed at fast pace. Major
\nmining sector reforms were announced under Aatmanirbhar Bharat package. BEML has some 70% share of indian earth moving industry. Mining
\nsector may see high growth in the future and I think large number of auctions
\nwill take place and this will help MSTC greatly which is another pick where we
\nhave invested big. It wins most of its orders like metro in global competitive
\nbidding which shows its mettle.<\/div>\n
\n<\/div>\n
\nThe only thing they need to
\ntackle is the high employee cost which is around 25% of the turnover (BEL has
\nsome 17%) but I think they are already on it as in 2019 they have reduced the
\nemployee count by 500 from 7600 to 7100 and this year the figure is at 6600. So for me this is one of the re-rating catalyst. Another catalyst
\nis any large near term order from metro etc. Its order book is around 10000 cr and almost 50% is from Metro projects. Its turnover this year is 3000 cr. Almost 70% of its turnover is generated through in house R&D efforts. It has spent 3.4% (104 cr) of its turnover on R&D in 2019-20. This year, BEML has delivered India’s first driverless metro cars to Mumbai metro which was launched by PM Narendra Modi. BEML has achieved 65% indigenization level in Metro car manufacturing in India so far and this is going to get better.\n<\/div>\n
\n<\/div>\n
\nBEML has been put on sale which
\nmay spur the big re-rating. BEML also has significant land holdings like in
\nBengaluru it has 205 acres of land, in Mysore 530 acres, 2,400 acres in Kolar
\nGold Fields and 375 acres in Palakkad. Last time when there was an outcry against
\nits disinvestment, the value of assets owned by BEML was claimed to be
\nstaggering 50000 cr when its market cap is just 2600 cr!!! <\/div>\n
\n<\/div>\n
\nCONCOR (CMP 430, market cap
\n26000 cr):<\/u><\/b> One of the best play on coming high growth in railways sector
\ndue to dedicated freight corridor.<\/div>\n
\n<\/div>\n
MIDHANI (CMP 200, Market Cap 3800 cr):<\/u><\/b> One of the best space and defence play in India. It deals in the manufacturing of advanced specific alloys catering to critical sectors like Space, aerospace and defense. Right now the major share of revenues are from Space so we can see that with higher local manufacturing of defense products its order book is going to grow big. It is investing big for capacity expansion and very soon it will see major growth in topline. This is not a stock to be missed.<\/div>\n
<\/div>\n
\nHindustan Aeronautics Ltd.
\n(CMP 900, market cap 31000 cr): <\/u><\/b> <\/span>I like this one and soon will be putting money
\nin this one.<\/div>\n
\n<\/div>\n
\n(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. reach me at oscillationss@yahoo.in).<\/span><\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

(Stocks covered: RITES Ltd, Bharat electronics Ltd, BEML Ltd, HAL, CONCOR, ELGI Equiments Ltd, Laurus labs, Sasken Tech) Ignorance is the biggest hindrance to growth but still the good thing about ignorance is that it itself does not pose as a hindrance\u2026it does not obstruct the path on its own. And that\u2019s exactly why Prejudice is most dangerous because it can mislead to wrong path while the traveller is assured of righteous which eliminates the chance of a course correction. Wrong path is more destructive than no path. And so we can see that religion is not marred by ignorance…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1161","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1161","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1161"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1161\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1161"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1161"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1161"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}