Fair valuation

Revaluation of land will be of limited use for CPSEs

Investors in the stock market tend to give lower valuations to public sector firms than they do to private companies. There are multiple reasons why state-run companies get lower valuations, including their public sector character, which often makes competing in the market more difficult. It was recently reported that central public sector enterprises (CPSEs) have been asked, starting next fiscal year, to target growth of 10 per cent in their market capitalisation every year. It shouldn’t be surprising that CPSEs and their administrative ministries are not pleased by this direction. However, a section of decision-makers in the government seems determined to increase the valuation of CPSEs. As reported by this newspaper on Monday, the government has now asked CPSEs to state the market value of their land and other real estate holdings. This would arguably lift market confidence in these firms.

It is usual for firms to not regularly revalue their real estate and other such assets, partly because the exercise is of limited value. It does not affect the functioning of the firm. The motivation for the government, however, is to push up the value of assets, which might attract investor interest and increase the market valuations of CPSEs. A higher valuation would help the government at the time of selling its stake in the market under the disinvestment programme. A higher value of assets on the books could also help the government during the strategic sale of unlisted CPSEs. It is worth highlighting here that the government often underperforms on the disinvestment front. In the current fiscal year, for instance, the government has so far raised Rs 9,329.90 crore against the target of Rs 1.75 trillion. It now depends heavily on the listing of the Life Insurance Corporation to get closer to the target.
 

However, as noted earlier, the revaluation of the land and real estate assets in the balance sheet is unlikely to change much for CPSEs. Investors in the stock market are more focused on financial and business performance, which are unlikely to improve with the revaluation of real estate assets. The value of the land and real estate assets is useful in the context of ascertaining the liquidation value of a firm, which would anyway be lower than the prevailing market valuation. Even in the case of a strategic sale, this might be of limited value if the company is sold as a going concern. There are additional complications in the land holdings of state-owned firms. Often the land allocated to a CPSE is for a specific purpose and is not expected to be sold by the company. If the government believes that CPSEs have undervalued excess land and they are in a position to sell, it can ask them to monetise it.

At a broader level, however, it is worth recognising that asset monetisation or revaluation would at best give a limited one-time push to market value. If the government intends to increase the valuation of CPSEs in a sustainable manner, it should focus on improving their operational and financial performance. One way of ensuring this is by giving CPSEs more autonomy and freedom to operate. Better performance and less government interference over time will automatically lead to higher valuations. This would not only result in higher dividends for the government but also higher receipts at the time of disinvestment.