LIC IPO: A Small First Step That Will Hopefully Lead To A Long Pending Reform
Even as the dust still settles on the handover of the cash guzzling Air India to the Tatas, the LIC IPO has got the market all abuzz. While it has been years in the making, now that it is finally here, the excitement is palpable. Reams have been written on the size, scope and value of one of India’s PSU crown jewels sharing its riches with the public, so another article focusing on the same points would just end up being yet another face in the crowd. What bears discussion is the topic of why the government continues to remain in business. Reform in the direction of eliminating this gets drowned out in the cacophony of accusations in the vein of “selling the family jewels” by a miniscule yet vociferous left, ably supported by headline (read: clickbait) hungry sections of the media and an opposition opposing for the sake of opposition.
The government being in business is a legacy of our socialist past, spurred further into the abyss by our association with the Soviet Union. While there is no doubt that some PSUs have achieved substantive levels of excellence – including at the very top of the heap: LIC – but overall it has only resulted in a massive mediocrity pandemic that has been ravaging this country for decades now. There are a breath-taking (and not in the good way) 366 central PSUs, of which 110 were not even operational, in the country which collectively earned a revenue of Rs. 24.62 lakh crore in FY20 – impressive you would say. However, the combined profit of these 366 PSUs is a mere Rs. 93,000 odd crore – that is a less than 4% net profit margin.
It gets worse though, as you analyse this granularly:
While the government continues to put a positive spin on the whole mess by highlighting the over Rs. 9.5 lakh crore of Reserves & Surplus with these PSUs as well as Rs. 3.75 lakhs contribution to the exchequer (through taxes, dividends & interest on government loans), it beggars belief looking at those numbers itself that 366 companies with revenues of over Rs. 25 lakh crore are contributing a mere 12.5% of that revenue to the government. To put that in context, these companies also include Petroleum Marketing companies whose sales are nearly 50% taxes – of which roughly half accrues to the central government.
If one were to turn attention to listed PSUs, one finds that in FY20 nearly 80% of the revenue and over 90% of the profit of the entire set of PSUs comes from the 58 listed PSUs. About 14 of these PSUs are loss making but overall looked at as a group they perform well. Yet ironically, the combined market cap of these entities is approximately Rs. 8.2 lakh crores, an astonishing 40% lower year-on-year – albeit in a bad year for the bourses, but the index itself was down 25% which means this group performed 60% worse than the market overall. Further analysis reveals a price-to-earnings ratio of 9.5x as opposed to 26.5x for the index overall. To put this in greater context, PSUs are spread across 21 industry sectors across Agriculture, Mining & Exploration, Manufacturing & Services (including IT & Telecom) so the metrics should expectedly be reflective of the overall average.
It is easy to glean from the above, that the government is not running this ship well – a ship that has cost over Rs. 16 lakh crore of taxpayer money! Only the deliberately oblivious or motivated segments would be unaware of the fact that the reason the government continues to operate these companies is to fulfil political & corruption goals with the bureaucracy pliant in order to ensure plum roles for themselves – all in the quest to running taxpayer money to the ground.
The monetization of a small portion of LIC will make crystal clear the value that has been locked into these companies. It is time that these exercises go beyond tokenism and this value is unlocked – this will help the public which is the real owner of these companies have stake and oversight as well as help government raise money to alleviate poverty and improve infrastructure in the country. The time has come to create a sovereign fund to hold a strategic stake in these companies, and to take public which can be & privatise those that cannot.
Ultimately professionally run companies will be more profitable and have improved market caps. For example the average profit margin of listed companies is in the range of 10-12%. So even on the Rs. 25 lakh revenue base currently (FY20), that would mean close to Rs. 3 lakh crores in profit. And given the diversified portfolio – across sectors & size - targeting an average PE (which was 26.5 as mentioned above), one could assume a potential valuation of approximately Rs. 80 lakh crores for these PSUs in FY20. Extrapolate this to 5 years down the line (to eliminate any lingering Covid-19 economic effects), with just a 10% year-on-year revenue growth and a decent improvement in PE ratios of 20% or so, then this valuation number could top Rs. 150 lakh crore. A strategic disinvestment approach over the next 3 years bringing down ownership across the board from an average of 70-75% to 30-35% could net the government up to Rs. 50 lakh crores while still retaining stock worth another Rs.50 lakh crores. Allocating 20-25% funds from the disinvestment and matching it from the country’s huge pile of forex reserves, a fund-driven structure could create a behemoth with nearly US$ 350 billion corpus. A mere 10-12% ROI on this would be close to 1% on a US$ 5 trillion GDP that we envisage. In a country with a tax-to-GDP ratio of 11.7% that is massive.
Ultimately the lesson is that while the LIC IPO is a good step in the right direction, are the powers that be along with their policy mavens ready to actually walk down the path? India has some of the best and most highly educated professionals – unfortunately a large number of them abroad and in most part serving foreign companies, including those in India – and it is time that the government woke up and leveraged our talent to unlock the massive potential locked within what has been long the fiefdom of the inward looking and self-serving polity & bureaucracy.
