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Yesterday’s Economic Times carried an interesting article on why it makes sense to have a holding company for all PSUs.
Personally, I am a proponent of dividend investing and think that it makes sense to go for good dividend paying stocks to build core of one’s portfolio. (Read more about Core-Satellite approach to build your portfolio here.)
So, when I read this article’s heading, I got even more interested as most of these PSEs are known to be good dividend paying companies. That’s a different matter altogether that its because of political pressures and lack of vision that these companies pay dividends.
I think the article makes a few valid points, if not all. These companies over years have accumulated huge reserves of cash, which are going unutilized or are being given back to shareholders (read govt). And by huge, I mean real huge. These PSUs have combined reserves that run into to lakhs of crores!!!
Now if there is just one board (of directors) and not different ministries that gives mandate to these companies, that too without any political intervention, just imagine how efficient and effective these PSUs might become. And this would eventually reflect in market-capitalization of these PSUs. A company like IOCL having 11 refineries (each costing almost 30,000 Crore) is available for less than 50,000 Crore! That is the level of undervaluation which exists in some of these PSUs.
And having a central holding company would ensure that these companies are run without direct interference by administrative ministries in their day-to-day affairs. But it is also possible that this approach would lead to situations where cash reserves of profitable companies are used to fund expansion plans of ‘dead’ loss making businesses. But these are operational issues which can be handled with detailed planning, where certain criterias would have to be met before cash reserve of one company would be used to fund other.
But on the face of it, this idea does seem to be an interesting one. Isn’t it?