If you want an easy way to make money, bet against PSU stocks: Saurabh Mukherjea

Saurabh Mukherjea was earlier a big fan of Public Sector Undertaking (PSU) stocks. A few years ago, he had recommended Coal India on the ground that it has "overwhelming sustainable competitive advantages — so strong that you can almost reach out and feel them — and yet are underappreciated by the market".

However, he has now done a somersault and developed contempt for PSU stocks. According to his latest newsletter, one of the easiest way for investors to benefit is to bet in favour of a steady decline of PSUs.

He has claimed that though PSU have the major market share in many sectors of the Indian economy, they cannot afford to hire and retain good talent. So, the private sector competitors of these PSUs are winning the war for talent and market share – year after year, decade after decade.



In an earlier newsletter, Saurabh described PSUs as "the gift that never stops giving".

He claimed that PSU Banks are unable to consistently generate RoE in excess of their cost of capital because they face an inherent conflict regarding whether they should allocate capital to reward minority investors or work to achieve the social or political objectives of their majority shareholder which is the Government of India.

The result is that the RoEs of such banks have lagged materially behind RoEs of the more efficient private sector banks. Consequently, without exception, the PSBs have had to mostly depend on constant capital infusion from the Government in order to meet their capital adequacy ratios and to grow their loan book size, he has said.

He has opined that the strongest private sector lenders are able to take market share away from PSBs whilst creating shareholder value for minority shareholders.

He has pointed out that the same scenario is playing out in life insurance and general insurance with the steady ceding of market share by giant PSU insurers. This is enriching Marcellus’ clients via holdings in well run general insurers like ICICI Lombard and life insurers like HDFC Life, he claims.

However, the veracity of Saurabh's hypothesis cannot be established because SBI Bank, the mother of all PSU Banks, has outperformed HDFC Bank, the mother of all Pvt Banks, as can be seen from the stock chart given above.