Can PSUs really lead India Inc's charge in beating slowdown?

Can PSUs really lead India Inc's charge in beating slowdown?
8 Feb 2009, 1450 hrs IST, Aman Dhall & Lisa Mary Thomson,
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In the good times, they faced the brunt of perception. They were the rusty government cogs which always paled in comparison to the shining wheels

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But with the global financial markets in choppy waters, public sector undertakings (PSUs) are being called upon to lead the way. And surprisingly, they are more than equipped to take the forefront.

Where lies the secret? The cash-rich status of many of these companies has been touted as their prize point. Add to this the relatively debt-free nature of their balance sheets and their presence in sectors which are the bare necessities and you have a winning formula.

But it’s simply not a question of what they have to offer but also the reasons that have brought them where they are. The navratnas particularly, have used the relative autonomy given to them to reinvent themselves in a big way. The numbers prove it all.

In a study conducted by Dun & Bradstreet Information Services India titled ‘India’s Top PSUs 2009’ which compared top 31 NSE listed state owned enterprises with the top 216 NSE listed private sector companies (with a short listing criteria of Rs 1000 cr or more in total income), it was revealed that total sales of 31 government owned companies was almost the same as the total sales of the 216 private sector companies. What this suggested was that in terms of revenues, the 31 PSUs are more or less equal to the 216 private sector companies put together.

You cannot deny that the PSUs, particularly the well-managed ones, are poised to lead India’s battle with the economic slowdown. But if you’re still not convinced, here are the explanations.

Trustworthy Performers.

The PSUs are the fitting contenders to lead the fightback of the slowing Indian economy. Not because they have a guardian angel in the government to support them, but they have time and again, proved their abilities.

Over the past five years, aside from the under-recoveries of the oil marketing companies (OMCs), PSUs engaged in engineering, power, banking, shipping and logistics companies have competed on a near equal footing with top private players in their respective sectors.

According to industry leaders, one of the key factors driving this exemplary performance has been their capability to significantly reduce the high debt levels which plagued their financial statements in the past. This exercise eventually allowed PSUs to clean-up their balance sheets to undertake expansion.

Says Ganesh Raj, tax partner and leader, policy advisory group, Ernst & Young; “Improved operating metrics have resulted in PSUs building strong cash war chests, which enables them today to defend as well as extend their market share, be it through organic or inorganic means.”

Raj has a point, which is mirrored in the PSUs performance. According to a Dun & Bradstreet study, the total aggregate income of the PSUs is almost equivalent to 31% of the country’s GDP at current market prices in financial year 2006-07 as well as in financial year 2007-08.

Moreover, the PSUs have maintained a low debt/equity ratio as compared to their private peers over a long period of time. With a debt/equity ratio of 0.45 in the previous financial year and higher level of cash, the PSUs are less leveraged than their private sector peers(debt/equity ratio of 0.68 in financial year 2007-08) and are better positioned to exploit business opportunities.

Economists feel that a significant advantage that PSUs enjoy is that their income elasticity as well as their price elasticity is low. Moreover, they operate in sectors which are necessities and hence their business cycle has not been affected by the current state of affairs.

Says Subir Gokarn, chief economist-Asia-Pacific at Standard & Poor’s; “They definitely have a more stable profile and less vulnerability. They have also considerably rationalised their cost-structures. With respect to the navratna companies, they have enjoyed a certain degree of autonomy in their operating decisions as well as in their investments. These investments have created capacity that would generate returns over a period of time.”

Blessing in Disguise

If one takes a closer look at the events of the past 14 months, the meltdown in the West could have played a vital part in the PSUs rise to possibly lead the next turnaround for the Indian economy. Economists argue that a positive spin-off has already been of a reduced salary disparity between the public and the private sector.

Earlier, the compensation packages offered by the private sector usedto draw away the best talents from the PSUs. Now with rationalisation in private sector remuneration and given the current job insecurity, retaining talent has become a relatively easier task for them.

Gokarn believes that the huge wave of exits that one used to witness from the public sector to the private sector would now slow down, thereby helping PSUs build further efficiencies in operations. “In terms of attracting fresh talent, it is still early to say whether a young management turk would be tempted to join PSUs in future. But, one must not under-estimate the private sector’s capability to draw talent pool especially from well-managed PSUs which have always remained a great source for excellent human capital,” he feels.

Not only that, PSUs are expected to emerge stronger in the financial, infrastructure, metal and power sectors going forward due to their robust financial strength.

In fact, even as the global banks were hit hard by the current crisis, banks in India showed remarkable resilience to the meltdown across the western world. As many as 19 Indian banks made it to the top 500 global financial brands of 2009, reveals a study by Brand Finance PLC in association with The Bankers magazine. This is in sharp contrast to last year when only six Indian banks made it to this coveted list. Interestingly, 13 out of these 19 banks are public sector banks.

“While the failure of large financial institutions across the globe has certainly contributed, the key reasons behind such a big jump in the number of Indian banks making it to the list are the prudent banking norms which govern the banking sector in India,” says Yashika Singh, head of operations — economic analysis group, Dun & Bradstreet Information Services India.

In fact, the growth curve reflects in the results of key Indian banks which have shown positive growth in terms of total income as well as net profit for the quarter ended December 2008. Another case in point are the OMCs. Through the linkages of financial markets and crude oil market, the meltdown in the financial market led to the withdrawal of speculative money from the crude oil market and hence the decline in crude oil prices. “In this context, it helped ease the burden of high crude prices, which was being borne by OMCs like Indian Oil in the form of huge under recoveries,” believes Sarthak Behuria, CMD of Indian Oil Corporation (IOC).

A section of industry leaders feel that the conservative policies followed by PSUs especially the banks has not only been a blessing in disguise but also has to a large extent insulated them from the global crisis. With government being the key source of funding for the PSUs, they think it gives them that extra edge to overcome the current challenges faced by the private sector vis-a vis obtaining debt for expansion.

Can they lead from the forefront?
PSUs operate in numerous sectors — a number of them core to the economy, such as banking, construction, mining, railways, telecommunication, power, defence. Given the nature of some of these sectors, they are expected to provide impetus to the economy even during the downturn. “PSUs in such sectors will play a critical role in providing growth. For instance, during the 11th five year plan, total investment on infrastructure development by PSUs alone is expected to be Rs 14,365.6 bn,” reckons Singh of Dun & Bradstreet.

The changing role of government — from a moderator to a facilitator — has also helped their cause. In the past few years, the government has played the role of “ignition key” in their turn around by granting more autonomy, and encouraging them to embrace the best market practices. “The government of India’s recent reluctance to immediately roll back fuel prices when the global crude prices fell sharply thereby enabling OMCs to recoup some of the losses which they incurred when fuel prices were not increased, clearly reflects their role in facilitating growth of PSUs rather than moderating the same,” says Raj of E&Y.

On Dalal Street too, PSUs have recently outperformed their private counter-parts. In 2008, the public sector companies paid over 33.5% of their net profits as dividends, whereas those in the private sector paid 20.6% of their profits as dividends. With a number of PSUs involved in businesses that have forward linkages, economists believe that their future performance will depend a lot on the macro-economic indicators.

“For instance, many PSUs are involved in the power business. If the demand for power goes down due to the slowing down of the economy, then it will definitely have an impact on the toplines of the petroleum companies,” says Gokarn of S&P’s.

Hurdles in the way
Arvind Mahajan, executive director — advisory services, KPMG, however, thinks there PSUs still have a lot of hurdles to overcome in the race to become invincibles. PSUs which don’t have navratna status require approval for their projects and investment proposals from government, which he considers is a stumbling block to their growth.

“This delays the process of creation of infrastructure and affects the performance of the organisation and generates complaints from users. In case of the airline and the shipping industry which are competing against private companies, there are immense constraints on how fast they can grow,” he says. According to him, the key remains in how the government can unshackle these companies and give them power and flexibility in their operations.

Business consultants believe that more than the ownership structure, the management practices will decide whether they will rule the next decade. “A classic example in point is of state-run Gujarat State Petroleum Corporation (GSPC) which has done well because of the mindset of the board of the company and their MD whose long association with the company has provided stability,” says Mahajan.

Other successful examples include the Power Financing Corporation (PFC), the National Highway Authority of India (NHAI), and the In-dian Railways. With respect to the railways, modifications in the freight segment have helped them achieve a turnaround and increase the value of output. Now they are looking at setting up a dedicated freight corridor. This freight corridor and the Delhi- Mumbai Industrial Corridor (DMIC), together have the potential of transforming the North-Western part of India over the next ten years.

Some other areas that needs improvement includes linking wages to performance and thereby placing a premium on efficiency of operations. Industry experts feel they should sharp-focus their marketing and sales arms to drive growth in turnover thereby they can leverage upon their expansive breadth of operations. “PSUs really need to work on their business strategy and examine whether they are using their resources to target the right audience. They need to evaluate the products they are selling and customers who are buying these, to check if these two aspects match,” says Gokarn.

K Ravi Kumar, CMD of Bharat Heavy Electricals (Bhel), however, believes that the PSUs are well aware of the need to consistently improve their competitiveness. “We have already identified areas like human resource, engineering and R&D, where we plan to focus more in the coming days. In fact, in the last two years, we’ve increased our spend on R&D considerably. We're implementing enterprise resource planning (ERP) in HR to improve efficiecy,” says Kumar.

In addition to having autonomy in their actions, Gokarn says that PSUs should move towards showing sensitivity to talent costs. His advise is that they need to look beyond the rigid cadre system, move away from the idea of having a life-time engagement with a single company and allow more flexibility at the lower levels. “PSU salaries at lower levels should improve. In the PSUs, the trade-off has mostly been with the assurance of some level of job security,” he says.