Thank you, Ram Naik

MICROVIEW

In retrospect, and with 20/20 hindsight, one can say that Ram Naik's dubious intervention "" which delayed the privatisation of the oil majors "" was not such a bad thing after all.

Not for the reasons he adduced (national interest, strategic sector and hokum), but because of fortuitous circumstances which no one could have foreseen.

Thanks to the totally unexpected bull run of 2003, there's no doubt that whatever price one had obtained for HPCL and BPCL in fiscal 2002-03 would have looked like peanuts today "" prompting another round of bogus political allegations about the family silver being sold for a song. In that sense, Ram Naik saved the day for the NDA government.

Consider the valuations: Most equity analysts were expecting bids for HPCL in the region of Rs 450-600 a share, but the market has already achieved the lower end of this range even without factoring in a change of ownership.

This much is obvious from the price movement in PSUs that are not on the disinvestment list "" ONGC, GAIL and Indian Oil, in particular. These three have risen by 200 to 300 per cent over the last one year, suggesting that the market is valuing these businesses differently now, and not merely because of the prospect of privatisation.

However, Naik has no reason to pat himself on the back, for he has been right for the wrong reasons. His argument has basically been that oil is a strategic sector, and hence needs to be in government hands; moreover, he can't do things like cross-subsidise products for the poor (kerosene, LPG) without the benefit of monopoly profits in other areas.

Actually, the stock markets are telling him something quite different. While it is true that the markets love companies that can generate monopoly profits, they want dominance to be achieved in a competitive marketplace.

Dominance that results from superior products and service has a higher value than government-mandated monopoly. A perfect example is Maruti. A few years back, when the government was scrapping with Suzuki over control of Maruti, most commentators were wringing their hands in despair.

They wanted the government to sell its stake before the automobile competition got hotter since Suzuki may have been willing to pay a better price for control then. Figures of Rs 5,000-6,000 crore were being mentioned as the appropriate value for the government's 50 per cent stake in the car company.

However, look at what the markets are telling us now, when Maruti is facing tough competition from the likes of Hyundai and Tata Motors "" apart from a host of others. The company's market cap is around Rs 10,500 crore "" which means that the government could have got the same price for its 50 per cent stake even in a competitive marketplace. The government did not lose out even by waiting.

Lesson one for disinvestment ministers: it is competitive success that drives market valuations, not merely government-handed monopoly. Now let's consider an opposite example: VSNL, which has lost value after privatisation.

It is now abundantly clear that VSNL's humongous profitability before privatisation was entirely the result of its monopoly in international services. Once the licence to print money was taken away by Pramod Mahajan, its bottomline hit new bottoms. So doesn't this prove the value of monopoly in driving stock values?

Yes and no. A monopoly PSU will certainly have higher valuations than one facing lots of competition, but the critical factor is not the monopoly itself but the freedom to manage the enterprise in the interests of shareholders.

That, unfortunately, was the crucial missing ingredient in VSNL "" or for that matter in companies like MTNL and BSNL. In the run-up to privatisation, VSNL just sat on its hands and did nothing to prepare for a post-monopoly world; moreover, the government gypped it of adequate compensation.

It still hasn't made amends. It was VSNL's inability (or government's unwillingness to let go) to prepare for a competitive marketplace that did it in. It will take the Tatas a while to rebuild value of shareholders.

Lesson two, this time for ministers who run PSUs: the market will value companies higher only if their managements are seen to be proactive and aggressive enough in the marketplace. Companies where ministers are seen to be in the driver's seat are unlikely to get decent valuations.

HPCL and BPCL are getting decent valuations only because the markets think their managements are reasonably independent to fight for their interests. If Ram Naik is seen to meddle too much with their decisions, their valuations will crash.

It would be easy to dismiss the current valuations of public sector shares as being entirely the result of a booming market. That's definitely a factor, no doubt. But if one were to accept the reality that no one can accurately predict when the markets will boom or go bust, the best way to ensure healthy valuations for public sector companies is to allow them to compete freely before thinking disinvestment.

rjagann@business-standard.com