India's Top PSUs 2009
  
 

In this study, Dun & Bradstreet India (D&B India) attempts to highlight the key trends of the Indian public sector undertakings (PSUs) and also provides an insight into their performance. The insights have been derived through a detailed analysis of data gathered from annual reports, regulatory filings, government websites and various other secondary sources. Besides, the section also showcases the changing dynamics of PSUs as compared to private and foreign companies in certain places.

The entire insights section has been divided into three sections: The first section (Section A) contains analyses of the financial and operational performances of the 134 central public sector undertakings (CPSUs) with a total income of more than Rs 2 bn that form a part of our study.

The second section (Section B) includes a comparative analysis between the private companies and the government-owned companies listed on the BSE. In this section, 191 private sector companies and 30 public sector companies have been considered.

The third section (Section C) compares public sector banks (PSBs) with their private and foreign counterparts but includes only those banks that have a total income of more than or equal to Rs 2 bn.

Section A

Section A reviews the performance of PSUs that have long formed the backbone of the Indian economy. The section analyses the performance of 134 PSUs that fall under the purview of the Central government and are also known as Central Public Sector Undertakings (CPSUs). The CPSUs that are involved in carrying out business for profit and whose total income is equal to or above Rs 2 bn have been selected for the study. On the other hand, companies with negative net worth and those declared financially sick by the Board of Industrial & Financial Reconstruction (BIFR) have been excluded from the study.

The PSUs that are considered for the study have contributed largely to the growth story of India in recent times.

The key highlights of the performance of these CPSUs in FY09 are as follows:

Performance review of 134 CPSUs

Manufacturing PSUs garner higher share in total net profit, in spite of negative net profit growth

In FY09, the 66 manufacturing PSUs constituted around 61.01% of the total profits of the 134 companies taken into consideration for the purpose of insights and among the manufacturing PSUs, the ones that represented oil and gas generation, and iron and steel and metals sectors had the highest contribution. Even though the manufacturing sector had a high contribution, on an overall basis, manufacturing PSUs demonstrated a declining growth in net profits. In FY09, the total income of manufacturing PSUs grew at a faster pace than their counterparts from the services sector.

Even though the services PSUs had a lower share in net profit at 38.99% during FY09, the banking and financial services sector recorded the highest net profit contribution among the 11 sectors that are a part of our study. In fact, the banking and financial sector alone contributed 86.02% to the net profit share of services PSUs in FY09.

Manufacturing PSUs, on the other hand, recorded a higher NPM of 7.03% as compared with 2.99% recorded by service PSUs, excluding banks.

Oil and gas generation sector continues to outshine others in terms of share in total income

The oil and gas generation sector reported steady performance during FY09 despite facing an unexpected economic meltdown, a volatile market and widely fluctuating crude oil prices. D&B India’s study reveals that over the past 2 years, this sector has been the leading sectors on account of its total income share among the other ten sectors in the study.

In FY09, the oil and gas generation sector had the highest share in the total income at 43.03% followed by banking and financial services and insurance at 19.72% and 13.14%, respectively; however, there was a significant gap between the share of the sector in total income and net profit on account of its very low NPM of 3.62%. In fact, oil and gas generating companies had one of the lowest margins among other sectors.

In D&B India’s study on Indian CPSUs in 2009 and 2010, the oil and gas generation, banking and financial services and insurance sectors were ranked among the top three in terms of total income share.

Banking and financial services overtakes oil and gas generation in net profit contribution

Despite the oil and gas generation sector having the maximum share in total income among the 134 companies, the banking and financial services sector recorded a higher net profit contribution. According to our study, in FY09, the banking and financial services sector led in terms of net profit contribution at 33.54% when compared with the previous year, when the oil and gas generation sector had dominated the net profit pie by contributing 27.94% of the entire net profits of the CPSUs taken for the study.

The second and third highest contributors to net profits in FY09 were the oil and gas generation sector with a share of 23.01% and the iron and steel and metal sector with a share of 11.91%. Improved interest margins due to moderating costs could have led to the notable growth of the banking and financial services sector in FY09.

Navratnas’ total income rises, equivalent to 15.20% of GDP in FY09

Navratna companies play an important role in the performance of the Indian public sector. The government has delegated enhanced powers to these companies because of their comparative advantage over other companies and their potential to become global players. Some of the powers delegated to these companies are scheme cover capital expenditure, technology joint ventures and strategic alliances, organisation restructuring, human resource management, resource mobilisation, joint ventures and subsidiaries, mergers and acquisitions, among others. As on November 30, 2009, 18 Navratnas were identified by the Department of Public Enterprises (DPE), and all these have been considered for this study.

The 18 Navratnas had a total income of Rs 8,478 bn in FY09, as compared to Rs 7,052.56 bn in FY08 and Rs 6,064.87 bn in FY07. In FY09, the navratnas total income was equivalent to 15.20% of India’s GDP (at current market prices) and it rose from 14.15% in FY07 to 14.25% in FY08.

The Navratnas’ share in the combined total income of 134 CPSUs rose during both fiscal years FY08 and FY09. While the share of Navratnas was an impressive 47.24% during FY08, it further rose to 48.06% in the subsequent fiscal year.

On the other hand, the combined net worth of these 18 Navratnas remained more or less unchanged in the 134 CPSUs in FY09 and remained at the FY08 levels. The percentage share was 41.48% in FY09 as against 41.49% in the previous year.

The top three Navratnas in terms of total income during FY09 represented the manufacturing sector. During FY08 and FY09, the top three Navratnas, IOCL, BPCL and HPCL, together accounted for 31.28% and 32.40% share in the combined total income of 134 CPSUs, respectively.

Western region leads in terms of total income contribution

Although the northern region has the maximum representation of companies, the share of the western region in the total income of the 134 companies was more than twice the share of the northern region. In fact, the western region dominated the other regions in the total income pie. The western region had a share of 56.94% in the total income of 134 PSUs forming part of the study in this section of the publication, while the northern region followed with 27.35% share.

Further, the study revealed that all the four regions in India showed consistency in their performance, as the share of each region in the total income has remained at similar levels over the past 2 years.

On the contrary, in terms of net profit contribution, the northern region captured the highest share. The study further reveals that the northern region contributed almost half of the entire profits of all the companies included in the study in FY09. This region was followed by the western and the southern regions that accounted for a share of 26.10% and 14.73%, respectively, in the combined net profits of all 134 companies.

Section B

In this section, we attempt to analyse and compare the performances of non-financial public sector companies with private sector companies that are listed on the Bombay Stock Exchange (BSE). D&B India conducted a financial analysis of 30 central government-owned listed companies on the basis of total income, and subsequently, identified 191 listed private companies with a total income of more than Rs 14,650 mn. For the purpose of this study, we have ignored the public-private companies in the private sector and the players in the IT and ITeS industry, which has a negligible number of PSUs.

In our financial analyses, the public and private sector players have been compared on the basis of their financial parameters for the period FY05 to FY09. The results, based on the financial performance of the PSUs, underline the sturdy resilience of the public sector amidst the market turmoil in 2008-09.

PSUs sales growth increased at a higher pace than its private peers in FY09

The growth in total sales of PSUs in FY09 was marginally higher than the growth of total sales of private sector companies.

In FY09, the total sales of both the private and public companies grew by 19.17% to Rs 21,197,085 mn over the previous year. Over the years, the sales of private companies rose at a faster growth rate than that of PSUs. In FY09, there is nominal growth in the economy owing to slowdown in the economy and the exports on account of contraction in the global demand. Over the five years period, the private sector has been recording an unstable growth rate as compared to the public sector which has been recording a consistent growth, except in year FY08, where the economy experienced a fall. The PSU sales have grown at a higher pace in FY09 (19.2%) than in the year before (12.8%), in spite of fierce competition from private companies who recorded a decline in growth from 22.1% in FY08 to 19.1% in FY09. This signifies that the PSUs survived the slowdown in the economy much better as is evident from their sales growth in FY09. The PSUs recorded a 5 year CAGR of 19.26% which was much lower than that of private companies which had a CAGR of 23.65% as on FY09, signifying a better sales performance by the private sector.

Net profit growth dips across the companies in FY09

The corporate sector has experienced a fall in the rate of growth of net profit as compared to the previous year.

The total profits of both the private and public sector in FY09 fell by 13.7% over the previous year to Rs 1,477,513 mn. In FY09, the public sector recorded a healthier performance, as its net profit fell by 10.83% while that of the private sector fell by 15.48%.

In FY09, the PSUs, excluding the oil and gas sector, performed much better in terms of profitability. The net profits of PSUs, excluding oil and gas companies, increased by 0.33% as compared with the private companies, whose net profits fell by 15.48%.

In FY09, the PSUs retained 63% of their profits and distributed 37% of the PAT as dividends. During the same period, the private sector retained 77% profits and distributed the rest as dividend.

In FY09, most indices recorded a negative index return; however the PSU Index registered the lowest negative return among the indices and was in a better position.

Private sector borrowings rose steadily during FY05-FY09

Over the years, the share of total borrowings of both public and private sector has increased at a considerable rate. The share of borrowings in the total liabilities of the public sector increased at a faster pace from 17% in FY05 to 22% in FY09 as compared with the borrowings of the private sector, which grew from 29% to 31% during the same period. This also indicated that the private sector has resorted more to borrowings than the public companies.

The borrowing trend of private sector is much steeper than that of the public sector. While the 5-year CAGR of borrowings for the private sector is 28.31% that of the public sector is only 17.22%.

Private, public companies mostly resorted to bank borrowings during FY09

The public and private sector companies mainly have resorted to bank borrowings for funding, majorly long term. In FY09, bank borrowings constituted almost half of the total borrowings of the public sector unlike 31.79% in FY05. During the same year, Govt borrowings, mainly from the Central government, accounted for 4.56% and 0.49% of the total borrowings of public and private companies, respectively.

During FY05, foreign currency borrowings were the major source of financing for the public sector (34.79%) whereas the private sector was heavily dependent on the banks (36.50%). However, by FY09, the public sector companies used bank borrowings more than any other financing source, consequently decreasing the reliance on foreign currency borrowings (22.92%).

During FY05, 63.52% of the funding of public sector was through unsecured borrowings majorly coming from banks and foreign currency borrowings whereas in FY09 only 58.70% came from unsecured borrowings. Unlike the public sector, in the private sector, the maximum borrowings of 69.10% came from secured borrowings in FY05, which decreased marginally to 53.71% in FY09.

Among the secured sources of borrowings of public sector, the issue of debentures and bonds was the highest source of financing during FY05 (43.65%) and during FY09 (39.74%). The issue of secured debentures in private sector formed only 26.12% and 14.82% of its total borrowings in FY05 and FY09, respectively.

PSUs are lesser leveraged than its private peers

The debt to equity ratio helps in assessing to what degree a company resorts to borrowed money. The ratio indicates the relative claims of the creditors. (The debt to equity ratio has been obtained by dividing the long term debt of the company by its shareholder equity).

Over the years, the private sector has experienced a higher debt to equity ratio as compared with the public sector, which also indicates high interest expense for these companies. The ratio has increased for both the sectors over the past 1 year due to the increased borrowings by the sectors to fund under recoveries.

In FY09, the debt and equity of the public companies increased by 31.05% and 11.04%, respectively, as compared with the previous year, while for the private companies, the debt and equity capital increased by 40.10% and 25.98%, respectively.

Some public sector companies are totally debt-free. The only exceptions are the companies from the oil and gas sector, which have incurred heavy borrowings to make up for the losses incurred due to high crude prices.

Public sector records higher interest coverage ratio

The interest coverage ratio determines the ease of paying back interest to outstanding debtors. Our study revealed that the public sector experienced a lower debt expense as compared with the private sector during the review period, thus indicating that the private sector relied heavily on borrowed funds.

The interest burden of both private and public companies increased significantly due to the high interest outgo and the falling profits.

The public sector had a record of higher margin of safety as compared with the private sector in the 5 years, which indicated a higher capacity to service its debts. There is a consistency in the ratio of PSUs over the years. In FY09, while India Inc experienced a spike in interest cost, the PSUs managed to retain their interest coverage ratio (6.32) higher than private companies (4.92). The interest coverage ratio of public sector came down from 11.97 in FY08 to 6.32 in FY09. In FY09, the interest paid by PSUs rose by 83.54% whereas that of private sector rose by only 55.0% over the previous year.

RONW dwindled for both sectors during FY09

The RONW of the corporate sector declined during FY08 and FY09 and denoted a decrease in the efficiency of the companies to generate higher shareholder returns. The ratio of RONW of public sector decreased from 18.7% in FY08 to 15.02% in FY09. In FY09, the public sector companies could generate more profits out of their net worth as compared with the private sector because the public sector profits fell by only 10.8% in FY09 as compared with 15.48% fall of the private sector. The low RONW of private sector in FY09 could also be attributed to the rise in net worth due to more issues and private placements. The net worth of the public sector grew at a 4-year CAGR of 13.91% whereas the private sector CAGR shot up to 30.50%.

PSUs pay higher dividend than private sector companies

The PSUs as compared with the private companies paid higher dividends to its shareholders in spite of its low earnings. Over the years, the dividend payout for the private companies has constantly declined, whereas it has remained more or less the same from PSUs. The PSU companies were generous in rewarding their shareholders by raising their amount of dividend even during tough times when majority of the private companies were cutting down on dividends. In FY09, the dividend paid out by the PSUs was 0.70% higher as compared with the previous year, whereas the private companies cut it down by 8.88% from FY08 to FY09. The PSUs paid out 37.43% of their net profit as dividend while the private companies shelled out just 22.33% in FY09.

PSUs continues to be one of the biggest contributor to the Government’s revenue

PSUs act as a good source of income for the government exchequer in terms of direct taxes and dividends. The effective tax rate for PSUs rose from 28.06% in FY05 to 31.50% in FY09, while the rate for private companies declined from 25.22% to 22.39% during the same period. The effective tax rate for private sector was much lower due to the tax concessions enjoyed by them. The amount of direct tax collected from PSUs in FY09 has decreased by 12% as compared with the previous year whereas that of private sector has gone down by 19%.

Public sector accelerates expenditure on R&D over the years

The government has taken several initiatives to augment public and private investments in research & development (R&D) and to obtain sufficient R&D manpower. The government has also initiated private-public R&D partnerships.

The rate of growth in R&D expenditure in private sector has declined drastically over the past 5 years as compared to the public sector, whose R&D expenses have been growing at a rapid rate. In spite of the decrease in the R&D expenditure growth of the public sector from 54.43% (FY08) to 32.80% (FY09), the growth still remains much higher than that of private companies’ R&D expenditure growth rate. The R&D expenditure growth of PSUs has slowed down in current year due to lower profit margin in the sector.

During FY09, 90% of the R&D expenditure in the public sector was from the oil and gas, iron and steel and capital goods sectors, whereas in the private sector, the pharmaceutical and automobile sectors were the major contributors to R&D.

During FY09, there was a slowdown in the R&D expense in the engineering & capital goods, oil & gas, and iron & steel sectors as compared to the previous year, whereas the mining, power, fertiliser and the other sectors showed a remarkable contribution towards R&D expenditure.

Section C

In this section, we attempt to compare the performance of scheduled commercial banks (SCBs) belonging to the public sector with the overall Indian banking industry. More specifically, this section intends to draw comparisons between the performance of public sector banks (PSBs) and the banks operating in the private sector, and foreign banks operating in India.

We have highlighted the key trends of the 59 SCBs in this publication, for the purpose of the comparison and have selected all SCBs who had a total income of more than Rs 2 bn in FY09, which comprises 27 PSBs, 20 private sector banks and 12 foreign banks.

The data for the study was collated through documents released by the Reserve Bank of India (RBI). We have examined various parameters such as income growth and composition, business growth, exposure to sensitive sectors, to gain insights on the banks.

The financial year ended March 31, 2009 has been a testing year for the Indian financial market owing to the global financial crisis and the challenges it posed for the Indian banking sector. Evidently, the sector has withstood the testing times and has shown resilience. Minimal exposure to toxic assets, which were the primary cause for the financial upheaval, has aided the Indian banks in sailing across smoothly over the troubled waters.

Summary of performance of PSBs

PSBs have over the years relayed its dominance in the Indian banking scenario, quite off late in the global arena as well. The economic recession that plagued banks world wide, saw the Indian banking sector, particularly banks belonging to the public sector remaining largely unaffected. Despite facing stiff competition from its peers in the private and foreign sector, PSBs have continued to have a stronghold in the Indian banking domain. The figures below clearly show that despite competition from other banks and several external factors, PSBs have proven their leadership in the country’s banking sector.

PSBs dominated both private sector and foreign banks in terms of contribution to total assets and accounted for a 72.11% share during FY09. In terms of deposits and advances too, PSBs accounted for 76.78% and 51.18% share respectively in FY09. Its share in the total income pie too remained at an exceptional 70% during this period.

The ratio of net NPAs to net advances for PSBs have declined steadily between FY05 and FY09, as compared to their private and foreign sector peers. During FY09, PSBs had net NPAs to net advances ratio of 0.09%, down from 0.20% in FY05.

PSBs dominate the Indian banking industry in terms of contribution to total assets

The total assets of the 59 SCBs which have been considered for this study, more than doubled to Rs 52,232.24 bn in FY09 when compared with the asset base of Rs 23,031.81 bn during FY05. Moreover, during FY09, the total asset base of the SCBs was equivalent to 93.69 % of India’s GDP, up from 71.10% of the GDP in FY05.

The PSBs had a dominant share of 72.11% of the total assets in the banking industry in FY09, followed by private sector banks at 19.62% and foreign banks at a share of 8.26%.

In fact assets of the 27 PSBs grew at CAGR of 20.97% during FY05-FY09 while that of private sector banks and foreign banks grew at a CAGR of 26.37% while foreign banks grew at a CAGR of 31.94% during FY05-FY09. Even the overall CAGR of the 59 SCBs covered in our study at 22.71%, higher than that of the PSBs.

In terms of deposits, the foreign banks outperformed the PSBs and the private sector banks, as their deposits grew at a 26.9% CAGR during FY05-FY09; however, in terms of advances, private sector banks outperformed both PSBs and foreign banks, as their advances grew at a 28.88% CAGR.

Net NPAs to net advances ratio of PSBs declines steadily

The NPAs tend to be relatively lower for banks during the expansionary phase, and are expected to rise adversely during times of economic slowdown, as prevalent today. However, the ratio of net NPAs to net advances illustrate that despite the sharp credit growth witnessed over the past few years, NPAs as a percentage of net advances declined consistently between FY05 and FY09.

The speedy decline in NPAs can be attributed to the economic boom reported during FY05-FY08, and the cautious and risk averse approach of banks, who have increasingly used restructuring and securitisation of risky loans to minimise bad loans. The concentrated efforts of the banks, which includes loan restructuring, securitisation, one-time settlements, and write-off of loss assets, has helped them bring down the NPA levels over a period of time. Furthermore, the formation of debt recovery tribunals (DRT), CDR mechanism and activation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI) have also helped the banks in cleaning their balance sheets.

The ratio of net NPAs to net advances for PSBs declined steadily between FY05 and FY09. However, both private sector and foreign banks reported a rise in this ratio between FY07 and FY09 after reflecting a falling trend in the previous 2 fiscal years.

The SARFAESI Act 2002 has laid the foundation for establishing asset reconstruction companies (ARCs) that can facilitate asset recovery and reconstruction. The primary purpose of this Act was to provide a structured platform for managing the mounting NPAs. With the enactment of SARFASEI Act 2002, the RBI issued guidelines and directions relating to registration and measures of ARCs, functions of the company, prudential norms, acquisition of financial assets and related matters. This model of securitisation and reconstruction of financial assets has been instrumental in controlling the NPAs of the banks in India.

PSBs have the highest exposure to the sensitive sector

The overall exposure of PSBs to the sensitive sector, consisting of capital, real estate and commodities, was Rs 36,750 bn in FY09, and accounted for 65.25% of the total exposure of SCBs during this period. Private sector banks and foreign banks on the other hand, had a share of 25.83% and 8.92%, respectively.

On a y-o-y basis, the lending of SCBs to sensitive sectors, capital market and real estate, increased marginally as on March 31, 2009. The exposure of SCBs to the capital market rose, albeit at an insignificant rate, due to the subdued conditions in the capital market and the perception of high risk in the market. The overall exposure of SCBs to the capital market reported a CAGR of 36% during FY05-FY09. Bank group-wise, the private sector banks reported the highest CAGR of 42.88%, followed by PSBs and foreign banks at 37.51% and 26.80%, respectively.

While credit to the commodities market declined that to the real estate market continued to increase, notwithstanding the subdued real estate market.

Exposure of SCBs to the real estate market underwent a steady increase between FY05 and FY09, at a CAGR of 38%. The PSBs dominated the growth in advances to the real estate market as compared with the overall sector. PSBs advances to the real estate sector grew at a CAGR of 44.20% during FY05-FY09, while the advances of private sector and foreign banks grew by 29.58% and 28.76%, respectively. The exposure to the commodity market by all SCBs decreased gradually after FY07 till FY09. In fact, as depicted in the graph below, during FY09, the exposure of foreign banks to this sector was the highest among other bank groups. During this fiscal year, only the foreign banks had some exposure in this sector, while both PSBs and private sector banks had no exposure.

PSBs account for almost 70% of the total income of all SCBs

The total income of the SCBs, which comprises both interest income and non-interest income, more than doubled to Rs 46,202 bn in FY09 from Rs 18,575 bn in FY05. The PSBs continued to dominate the Indian banking industry in FY09 as they accounted for almost 70% of the total income while the private sector banks had a 22.25% share and the foreign banks had a 7.75% share.

The interest income is the interest earned on loans and advances, whereas the non-interest income includes fee-based income, income from treasury operations, gain/loss on sale or revaluation of investments, gain/loss on sale of banking and non-banking assets et al.

During FY05-FY09, the interest income of all SCBs, which is a major constituent of the total income of banks, increased by 26.34% CAGR due to accelerated economic growth — notwithstanding the global slowdown — heightened industrial activity, and the subsequent robust credit growth.

Though the PSBs had a lion’s share in the total interest income earned by banks in the past, during the 3 years ended March 31, 2008, they consistently lost out to private sector banks and foreign banks. In FY09, however, their share in the total interest income rose again when compared with their falling trend in the previous 4 years. During FY09, the share of PSBs in the total interest income earned by SCBs increased by 91.5 basis points, while that of private sector banks and foreign banks declined by 70.30 basis points and 21.18 basis points, respectively.

PSBs have the lowest share in fee-based income

Fee based income has created an additional revenue stream for most banks. The consolidated fee-based income of SCBs during FY05-FY09 grew at a CAGR of 34.19%, outweighing the growth in interest income. The boom in the economy has led to richer opportunities in public markets, investment banking, M&A deals, etc; for most banks.

In terms of fee-based income, the PSBs share in the total fee-based income of all banks declined in all of the 3 years till FY07. However, in FY09, fee-based income of PSBs as a percentage of total fee-based incomes of SCBs increased to 7.54% from 7.14% in the previous fiscal.

The fee-based income of private sector banks outperformed the foreign and public sector banks by growing at a CAGR of 36.04%; the fee-based income of private sector banks and foreign banks grew at a CAGR of 34.53% and 21.96%, respectively. The overall share of feebased income increased from a mere 18.07% of the total non-interest income in FY05 to more than 26% during FY09. PSB’s share of fee-based income in its non-interest income rose from 2.79% in FY05 to 3.52% in FY09.

In 2009, the fee-based income accounted for 14.55% of the total income of private sector banks, 11.55% of the total income of foreign banks and less than 1.0% of the total income of PSBs. PSBs had the lowest income from fee-based services among its private and foreign sector peers.

Apparently, in spite of their dominance in interest income, PSBs have a lower share in fee-based income, unlike both private sector banks and foreign banks. In fact, enhancing its earnings from fee-based activities can become an increased focus area for PSBs. In this way they can further strengthen their presence and dominance by augmenting their revenue, thereby remain competitive in the global banking arena.