Money Lying On The Sidewalk

The Indian markets are getting no love from investors right now. The country looks like a complete basket case. Inflation is high, interest rates are high, the currency is weak, current account and fiscal deficits are high, policy is in a complete state of paralysis, GDP growth is collapsing and the mood is completely gloomy. The Indian government is doing itself no favors and having shot itself in both feet is headed toward shooting itself in the head.

While the above scenario has affected the entire Indian market and prices/valuations are at significantly low levels, one segment of the market that has been even worse affected are government owned companies. Companies owned by the federal and state governments of India have seen a mass exodus of existing investors and are not garnering any interest from new investors.

This is clearly visible in the response to the follow-on offers being put out by the Indian government through the stock exchanges. Even those companies where the government has conducted fire-sales and priced issues at discounts to prevailing multi-year low prices, the response has been poor. The Life Insurance Corporation (LIC) has had to bail out every single follow-on offer by stepping in and buying the unsubscribed portions of the offers.

While government owned companies don't set the benchmark for management prowess and capital allocation, Indian government owned companies are not like their Chinese, Russian or Latin American counterparts. Many of them are extremely well run companies with significant and valuable assets. Many of these companies are run for profit with the objective of maximizing shareholder returns. In several of these state owned companies the price value disconnect has become so large that extremely asymmetric (low to non-existent downside with very large and significant potential upside) opportunities have emerged.

In my opinion, many of these government companies are trading at prices that are the equivalent of money lying on the sidewalk. One can always find a yeah-but to not invest in a company. In my opinion, one should suspend their bias against state owned companies and objectively look at them in detail. It will become apparent that quite a few of them are trading at ridiculously attractive prices.
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