'PSU Status' - A wide Moat for a select few !

Arguably the most hated word in the Indian equity market is 'PSU'. Most institutional investors categorize these stocks as 'untouchables' & those investors that consider owning them always give them a discount to the private peer. We all know the reasons & the pain that investors have experienced in many PSUs thus no point elaborating what is wrong with them. In this post I would like to highlight some businesses/ traits that benefit out of this PSU status.   

IRCTC

IRCTC is an exclusive train ticket booking platform under the Ministry of Railways. They are permitted to charge a 'convenience fee' & other platforms have to route offerings via them. Thus competition for both price & volume has been eliminated. The company has no outgo on promotion & yet enjoys 100% market share.  

Now compare this to private air ticket booking portals where each one is burning cash & trying to fight on pricing/ advertising/ promotions to gain a miniscule market share. If IRCTC would be a private player then it would no different from the air ticket booking portals and not a $10 billion gorilla that it is now. 

MSTC

MSTC is an auction portal under the Steel Ministry. While this does not enjoy an exclusivity as assigned to IRCTC yet it is preferred by other PSUs, municipal corporations, state governments & GOI for auction of various resources. In a country like India both auction & procurement processes are laced with corruption thus doing it on the MSTC platform implies a neat process. It is a stated objective of many government departments to move more asset sales to the MSTC platform thus the company generates a large volume without any promotion or unique user experience. It does so because of its parentage. 

GNFC

GNFC is a leading chemical & fertilizer player owned by the Govt. of Gujarat. The chemical foray of GNFC has its root in the ideology of import substitution. Chemical factories are both polluting & inflammable. These health hazards are something private players find very difficult to address. Vedanta had to shut its copper smelter in Tamil Nadu for environmental reasons & even an MNC like Dow(Union Carbide) had to flee India when casualties have taken place. 

GNFC's complex TDI plant is susceptible to accidents & many workers have succumbed to accidents due to gas leaks etc. If this was a private plant then the unions/ government would ensure closure but the PSU tag protects GNFC from even halting operations for a week. 

TNPL

TNPL is one of the largest integrated paper mills in India & is promoted by the Govt. of Tamil Nadu. This key raw material is wood & given the environmental concerns procuring wood has become a Herculean task. TNPL being a govt. entity is consistently awarded land for forestation & tie ups with farmers are done at reasonable prices thus ensuring complete integration. The company is one of the few in the sector that has grown capacity rapidly & due to raw material availability produces the best quality paper. Only a handful of mills in India have integration & most are unable to expand as incremental forestation land is not allocated. 

• West Coast has not added capacity for 10 years. 
• Seshasayee in the last 20 years has organically increased capacity 50% or 50,000 TPA only despite having the best project management & consultancy division which caters to every mill in the industry.
• TNPL which was setup by the founder of Seshasayee has increased capacity 7 fold in 20 years by 550,000 TPA with complete integration. 

The above list is not exhaustive & am sure many other PSUs fall in this category. I have highlighted the above as we have studied them in detail & either have exposure or had exposure in them in the past. We have found them rewarding trades as market pessimism ensured unbelievable entry points. These are not recommendations merely highlighting how widely held perceptions can create good opportunities.