Thread by @jshilanjanm

#GujaratGovt’s directives on dividends & buybacks is a big bad negative for the state’s 7 PSU stocks! 📛📛

Here’s why I booked profits in 2 of those, with no plans to reinvest 👇

Here's how the share prices surged in the last week 🚀🚀

📈 Gujarat Narmada Valley Fertilizers and Chemicals Limited (11%)
📈 Gujarat Industries Power Company Ltd - India (23%)
📈 Gujarat State Fertilizers and Chemicals Ltd (29%)

📈 Gujarat Alkalies and Chemicals Limited (9%)
📈 Gujarat Mineral Development Corp (18%)
📈 Gujarat State Petronet Limited (8%)
📈 Gujarat Gas Limited (3%)

Why such big moves?

Cuz, the #GujaratGovt mandated:

🔆 PSUs will give shareholders a min. dividend of 30% of profit after tax (PAT) or 5% of net worth, whichever is higher

🔆 PSUs with a min. networth of Rs 2kcr & cash balance of Rs 1kcr will compulsorily buyback shares

Following this, investors lapped up their shares in big volumes. Why?

Given each of the 7 stocks has been consistently profitable & cash-rich, as long as that continues to hold, these companies will now be bound to:

👉 Do compulsory buybacks
👉 Issue big dividends regularly

Thus, it COULD BE a great short/medium-term money-making opportunity for shareholders.

But then, why am I unhappy?

🔆 All 7 companies operate in highly cyclical infra or commodities space. Thus their profits also move up & down in a big way

🔆 Globally, successful companies in such sectors have built scale & money by accumulating cash during boom times & using it for growth in bad times

🔆 But with frequent dividends & buybacks draining their cash, these PSUs won’t be able to pursue the strategy. And I think this is not mere speculation at my end, because there is precedent

🔆 Just look at Central PSUs like ONGC, HPCL, SAIL, Coal India etc, and their respective private sector competitors. The results stand out

A recent editorial from The Hindu Businessline put it best: Sound capital allocation decisions in PSUs are better enforced through autonomous Boards and visionary top management, than through one-size-fits-all distribution mandates 👏👏

Plus, think from the way big investors think:

🔆 India is seen as a growth market & big investors accord high valuations to companies with strong growth runways, not those frequent buybacks/dividends

🔆 PSUs paying high dividends such as #ONGC and Coal India Limited trade at PE multiples, while the low dividend-paying IRCTC trades at over 50x!

🔆 Thus, Gujarat Govt should have rather freed up these PSUs from such clutches, giving a clear mandate to pursue growth

But, it is what it is. And it is for the shareholders to judge if this makes good sense or not.

I personally know, where I stand 😅

Biz News+ WA group: openinapp.co/9mioi

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Note: This is a personal #investment thesis & not a #stock recommendation.

#Gujarat #GujaratGovt #StockMarkets