Realty Check: The Indian Real Estate Story
  
 

Insights

Dun & Bradstreet (India) attempts to highlight key trends in the Indian public sector undertakings (PSU) and provides insights into their performance in two sections through this study. In each section, the study presents the insights derived from a detailed analysis of data gathered through secondary sources. The first section is an analysis of the financial and operational performance of the 121 central public sector undertakings forming part of the publication. The second section presents a comparable matrix between the private companies and the government-owned companies listed on the NSE.

In an attempt to highlight the industry trend, information was gathered from annual reports, regulatory filings, and data with industry association, regulatory bodies, government websites and various other secondary sources. The information thus gathered for analysis was used to understand changing dynamics of PSUs as compared to private companies.

Section A

This section comments on the performance of PSUs that have long formed the backbone of the Indian economy. The publication features 121 PSUs that fall under the purview of the Central government and are also known as Central Public Sector Undertakings (CPSUs).

The PSUs that are featured in this publication have contributed largely to India’s growth story in recent times. The key highlights of the performance of these CPSUs in FY08 are as follows:

Review of the performance of 121 CPSUs

Oil and gas generation sector records highest total income share, albeit, with low margins

The oil and gas generation sector had the highest share in both total income (42.82%) and net profit (28.94%) of the 121 CPSUs. There was a significant gap between the sector’s share in total income and net profit on account of its very low NPM of 6%. The iron and steel sector had a bigger share in the net profit pie (13.59%) than in the total income pie (4.98%) and enjoyed a healthy NPM of 23%.

 

Manufacturing PSUs register higher RONW

The manufacturing PSUs recorded a higher RONW (19.3%) as compared with the services PSUs (12.0%). The 121 profiled CPSUs collectively registered a RONW of 15.8%. The profiled PSUs registered a combined net worth of Rs 7,690.82 bn.

Banking & financial services sector has highest representation but lower share in total income

The banking and financial services sector had the maximum representation of companies (31%). In spite of this, the share of oil and gas generating companies in the total income of all the 121 companies was more than twice the share of banking and financial services companies.

Navratnas’ total income equal to 15% of GDP

The 18 Navratnas as identified by the Department of Public Enterprises had a total income of Rs 6,871.62 bn in FY08, which is equivalent to 15% of India’s GDP at current market prices. The share of these Navratnas in the combined total income of 121 CPSUs was an impressive 47% during FY08. Their combined net worth was 41% of the total net worth of all profiled CPSUs./p>

Section B

This section presents a comparable matrix between the private companies and the government-owned companies listed on the NSE (excluding financial companies). In this endeavour, D&B India firstly selected the top 31 government-owned listed companies (29 central government companies and 2 state government companies) in terms of total turnover. Subsequently, it identified private companies who had a total turnover of over Rs 10 bn. (The benchmark was taken as Rs 10 bn to ensure fair assessment because out of the 31 PSUs identified for the study, the 31st company had a total turnover of about Rs 10 bn).

The private companies thus selected were screened further and those companies whose comparable 12 month data for any of the previous five years were not available were excluded. The players in the IT and ITeS industry were also excluded because PSUs have a negligible presence in this industry. Finally, D&B India arrived at 216 private sector companies.

A comparison of PSUs vis-à-vis their private sector peers suggests that PSUs had a significant role to play in India’s growth story in the last five years. They managed to achieve similar growth rates as their private peers. It’s noteworthy that because of the government’s role, PSUs have proved to be a little more risk averse and hence financially-sound. It is expected that the measured approach that the public enterprises have taken over the last few years will hold them in good stead in the current financial downturn.

The following study compares the financial parameters such as sales growth, tax payout ratio, dividend payout ratio et al of PSUs and private companies.

Sales

The total sales of the 31 government-owned companies were just marginally lower than the total sales of the 216 private sector companies. Though the private sector has grown at a slightly faster rate than the PSUs, the businesses of PSUs have not lagged far behind in the last five years. Another noteworthy observation is that in spite of a huge base in terms of turnover, sales growth of PSUs has remained robust throughout the last five years.

Even though PSUs are losing their monopoly and India is taking further strides in liberalising its economy, PSUs are managing to grow at a healthy pace. Infact it is evident in the study that the sales of PSUs has outperformed the private sector in four out of the past five years.

On further scrutiny of the toplines of the selected companies, a few private sector companies were found to have earned incomes from discontinued operations. However, no such income was recorded by the PSUs. One reason for this could be the social commitments of PSUs, which do not allow them to conduct unviable business units. Instead, the PSUs offset losses arising from such units with profits earned from different business units.

PSUs bring home huge monetary gains despite the social obligations

Apart from fulfilling their social commitments, public sector enterprises are contributing a huge sum to the exchequer through direct taxes1 and dividends. The effective tax rate for the PSUs grew from 28.9% in 2004 to over 31.4% in 2008 while the effective tax rate declined by over 350 basis points for private sector companies to 22.9% for the same period.

 

PSUs not only take the lead while contributing to the government’s kitty through direct taxes but also lead when it comes to rewarding their shareholders with dividends. In 2008, the public sector companies paid over 33.5% of their net profit as dividends to equity shareholders, whereas their private sector peers paid only 20.6% of their profits as dividends. Over the last five years, the dividend payout ratio has consistently declined for the private sector companies, whereas it has remained more or less the same for the government-owned companies. As the government owns a majority stake in the publicly-listed PSUs, a huge share of the dividends goes to the government’s kitty. Thus, the PSUs make a much higher contribution to the exchequer through both taxes and dividends.

 

Export to Sales

Predictably, the PSUs earn most of their revenues from the domestic market. Exports constitute a miniscule portion of total sales even though the ratio of exports to sales of PSUs has been increasing slowly and steadily in the last three years.

Cash Ratio

The cash ratio (cash and bank balance/current liabilities) is an indicator of the extent to which a company can pay its current liabilities with cash in hand without relying on the sale of inventory and receipt of accounts receivables. The cash ratio for the listed public sector enterprises rose sharply from 24% in 2004 to around 42% in 2008. Meanwhile, their private sector peers’ cash ratio initially improved from 19.18% in 2004 to 30.0% levels during 2005, 2006, and 2007, and later on declined sharply to 21% in 2008. This measure of liquidity suggests that the public sector enterprises are better off in tackling their current liabilities (42%) with the most liquid asset — cash.

A look at the table below shows that while the cash and bank balances for the listed PSUs have consistently grown stronger and stronger on the one hand, on the other hand, private sector peers’ cash balance declined by 7.5% in 2008 as compared with 2007. If the expression Cash is the king holds true then the PSUs are definitely better prepared for tough times like these.

Debt Equity Ratio

The debt-equity ratio (debt/equity), which signifies a company’s financial leverage, has always remained on the higher side for private sector companies. The public sector companies are lesser leveraged than their private sector peers because their debt levels are lower; hence, the PSUs are in a stronger financial position to weather the economic downturn.

Even though raising money in the present market conditions is becoming a difficult task, the PSUs are enjoying a low debt and huge cash reserve position. In the past few years, many private sector companies wanted growth at all costs, whereas PSUs used their strong earnings to strengthen their balance sheets and make calculated expansions.

(For the analysis, the financial data of PSUs range from March 2004 to March 2008. Also, as different private companies follow different financial year ending, their financial data ranges from December 2003 to September 2008).