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PSU Stocks & the 7 Hidden Risks Investors Generally Ignore | Should I Invest in PSU Companies?



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In this video, we delve into the world of public sector companies in India and uncover the hidden risks involved in investing in them. On the face of it, PSU investing is commonly perceived as less risky given the implicit guarantee of government support, attractive PE ratios, and generous dividends. But it's also true that the Nifty PSE Index has underperformed the broader market and more than half the companies within this index have share price returns lower than the standard inflation rate.

There are 7 risks I have highlighted in this video:
1. A change in policy and this is exemplified by the situation with the Indian Energy Exchange Limited (IEX)
2. A sudden change in formula by the government which can significantly impact the valuation and profitability of companies as it happened with LIC (positively) and Bharat Electronics Limited (negatively)
3. Risks associated with unlisted companies within the PSU as was the case with Ramagundam Fertilisers and Chemicals Limited (RFCL) and Engineers India Limited (EIL)
4. Execution ability becomes another crucial aspect to consider when investing in PSUs and the video highlights the decline in Bharat Heavy Electricals Limited's performance
5. Loosening of priorities is identified as another risk, as public sector companies may prioritize factors such as job creation and customer satisfaction over profitability
6. Management incentives, or lack thereof, are explored next and case in point is the disparity in salaries between public and private bank CEOs
7. Limited information transparency and public scrutiny

Category
Management
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