We have seen PSUs making a comeback. Air India is going back to the Tatas. The finance minister said in the United States that she is trying to push through the LIC IPO even before March 2022. How hot is this space for Kotak AMC?
We have been very selective buyers of PSUs. The real challenge with PSUs is administrative flexibility and compensation. Many PSUs have excellent manpower and resources but they do not necessarily have administrative freedom with which they can compete with the private sector. For example, if you look at a private sector bank, many of the people continue to do the same function over a long period of time and develop expertise and in public sector banks, you have rotation every third year.
If you look at the compensation policy, the average pay scale in PSU banks is higher than the average pay scale in private sector banks. In PSUs, lower end people are paid much more while being much lower at the higher end. In private sector banks, it is the opposite. So how does one retain talent? These are the challenges of administrative freedom and compensation philosophy which has made us very selective on PSUs. They were available at a very cheap price and hence there has been some rerating thanks to the strategic divestment policy followed by the government. One of the growth stories of India is where the government wanted to be in businesses to government having no business to be in businesses.
That whole argument about is there a bubble and quality stocks have started again. Should we seriously look at the valuation proposition that some of the businesses in India are priced to perfection and shareholders are unlikely to make great returns?
I have a very simple commonsensical philosophy: silver, gold and diamond are valuable and have good quality. You are not going to buy silver at gold’s price, you are not going to buy gold at diamond’s price. Gold is quality no doubt about it but you do not pay diamond’s price for it. When you are buying quality at any price, then you are compromising on your future return. You are assuming that these valuations will continue forever. These are quality businesses no doubt but is that business getting valuation because of this quality business or because floating stock is limited? We need to make a very judgemental call about it. We believe growth at any price is not good for investors’ returns, growth at a reasonable price is good enough for investors’ returns.
Do you think the dilemma for an investor or a fund manager is that there is more money and less ideas? Are we going through such a patch?
Fortunately a lot of IPOs are coming in. There is a fair amount of supply from the promoters including private equity funds and I do not think there is dearth of…