Little headroom for PSUs to invest

The government’s move to take the public sector route to kick-start the capex cycle in the economy may not yield the desired results, analysts say. That’s because of the poor finances of non-oil PSUs and excess capacity in most of the sectors where these firms operate.

“This idea has been floated in the past but it’s neither feasible nor desirable from an economic point of view. PSUs are not in a financial position to make large investments, given their poor financial ratios and low-single digit returns,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.

"Also, PSUs largely produce basic goods whose demand is determined by downstream industries such as consumer goods, chemicals, engineering, transport and agriculture," Sinha added.

None of the downstream sectors are showing demand salience right now. “So even if PSUs manage to scale up their capacity right now, it will saddle the economy with even more spare capacity and a further deterioration in their financial metrics,” Sinha said. The listed non-oil PSUs together had reported return on equity (RoE) of 4.7 per cent in FY17, slightly up from 4.4 per cent a year ago, but much lower than the yield on government bonds of 6.7 per cent. The ratio was 7.9 per cent three years ago and 13.2 per cent at the peak in FY07. Oil PSUs such as Oil and Natural Gas Corporation and Indian Oil reported slightly better RoE of 8.9 per cent in the previous fiscal year. However, at these RoEs, the management would have little confidence to make fresh commitments to new projects.

PSUs’ ability to takes risks has also weakened in recent years due to a steady decline in their cushion of cash reserves and retained earnings (net profit minus equity dividend). Cash and bank balances of 36 listed PSUs halved in the past three years to Rs 1.04 lakh crore in FY17 as they have repeatedly dipped into it to pay special dividends in recent years. There was a mild revival in the profitability and retained earnings in FY17, led by oil PSUs and the recent rise in metal prices.

Analysts also said additional capex in the current environment could lead to indebtedness creating financial problems for them in the longer term. All 36 listed PSUs together made fresh capex of Rs 60,700 crore last fiscal year, up from Rs 45,000 crore a year ago. This was largely led by oil PSUs, while non-oil PSUs reported a sharp decline in capex to around Rs  25,000 crore in FY17, from Rs 55,000 crore a year ago.

Fresh capex is, however, being largely funded through additional debt with the gross debt-equity ratio for non-oil PSUs rising 0.96 times in FY17 from 0.72 in FY14 and around 0.4, 10 years ago. 

In value terms, non-oil PSUs combined net debt (excluding cash) has been growing at a compounded annual growth rate (CAGR) of 32 per cent in the past three years against a stagnant revenues and 13 per cent annualised decline in net profit during the period.

Lower crude oil prices have resulted in higher profitability for oil PSUs but a capacity expansion at the current juncture may not be a good idea given that fuel consumption in the country is declining at present.

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