psu perform or perish

Perform or Perish?

PSU

I N D I A N

PUBLIC SECTOR UNDERTAKINGS

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PSUs

Regional imbalances

Employment

Social responsibility of the state

Public Sector: Inceptiono Prior to Independence- few ‘Public Sector’

Enterprises. These included

– the Railways,– the Posts and Telegraphs – the Port Trusts – the Ordinance Factories – All India Radio – few enterprises like the Government Salt Factories,

Quinine Factories, etc.

Public Sector: Inception

• Post Independence - the country was facing problems like

– inequalities in income– low levels of employment– regional imbalances in economic development– lack of trained manpower

Public Sector: Inception• India at that time was

– predominantly an agrarian economy with a weak industrial base– low level of savings – inadequate investments and infrastructure facilities

• The 1948 Resolution envisaged development of core sectors through the public enterprises. Public Sector would correct the regional imbalances and create employment.

THE PUBLIC SECTORWhat? when? how?

Objectives of Establishing PSUs• Rapid economic growth &

industrialization• Earn return on investment & thus

generate resources for development• Promote re-distribution of income &

wealth• Create employment opportunities• Promote balanced regional

development• Development of small scale industries• Save & earn foreign exchange, vital for

any economy

Major Features of PSU• 18 Navratnas contribute 15% of GDP and 47% of total

income of the PSUs FY 2009.

• Share of PSUs in India’s GDP at market prices at 11.12%.

• Contribution to the extent of 27% in the total industrial output

• PSUs account for more than 1/3rd of total revenue receipts of the Central Government

• The net worth of all enterprises stood at Rs 4,530 bn (FY 07)

• PSUs paid a dividend of Rs 268 bn in FY07

Major Features of PSU• Account for 11% of the total

merchandise exports of the country

• 53% growth in turnover between FY04 and FY07

• Net Profit increase from Rs 695 bn in FY06 to Rs 816 bn in FY07

• Number of loss making institutions decreased from 89 in FY04 to 59 in FY07

Maharatnas• Mega public sector undertakings ONGC, SAIL and

NTPC got greater financial and operational autonomy after the government accorded the Maharatna status to these firms to help them emerge as global giants.

• The coveted status empowered the boards of these firms to take investment decisions up to Rs 5,000 crore as against the present Rs 1,000 crore limit without seeking government approval.

Navratnas

Miniratnas

Problems faced by Public Sector Undertakings in India

• Low Productivity. Low capacity utilization and low efficiency.

• Low rate of return on capital. Large number of loss making firms.

• Poor work ethics and quality of services.

• Over capitalization due to substantial time and cost overruns.

• Bureaucratic controls.• Most of the PSU’s were monopolies in

their industries due to tight governmental controls, and hence they were not very efficient

Reasons for poor performance of PSUs• Red tapes

• Bureaucracy• Risk aversion• Ineffective governance structures• Meddling by politicians• Corruption• Rampant nepotism in

appointments of managers• Inability to hire the best talent

because of poor compensation

THE PUBLIC SECTORFINANCIAL INDICATORS

The facts and figures FY 08

Sector-wise Net profit margin of PSUs FY 08

Source: D&B Research

The CPSU trends

The CPSU trendsFY 08

Comparison of public and private sector

• Dun and Bradstreet Research Aug 2009• 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.

• 216 private companies where studied.

Sales

High contribution: Oil and Gas Sector

ONGC, BPCL, HPCL, IOCLPower Sector

Effective tax rates

• 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.

Export to Sales

High contribution: Reliance Industries

Debt Equity Ratio

High contribution: BHEL (almost zero)

Vis-à-visL&T (0.5:1)

Cash Ratio

DISINVESTMENTA necessary evil?

Disinvestment• Disinvestment is the withdrawal of capital

from a country or corporation:

• Disinvestment involves sale of only part of equity holdings held by the government to private investors.

• Disinvestment process leads only to dilution of ownership and not transfer of full ownership.

• Privatization refers to the transfer of ownership from government to private investors.

• Disinvestment is called “partial privatization”

The Arguments for Disinvestment

• Measure to curb fiscal deficit.

• Sensex rallying at 17000 points in this FY.

• “There should be no flooding of offers in the market or else they would eat into the valuations”: Sivaji Sarkar.

http://www.sarkaritel.com/news_and_features/infa/january2010/07psu_disinvestment.htm


DISINVESTMENT

FIGURES

Disinvestment: Present State

Company Government Stake (Present)

Expected Disinvestment Value

( Rs. Bln)NMDC 98.4% 160

NTPC 89.5% 100

Rural Electrification 81.8% 44

Engineers India 90.4% 12

Hindustan Copper 99.6% 40

Power Grid Corp. of India

86.4% 47

Steel Authority of India 85.8% 45

Government Profitable listed public-sector companies, where its stake is more than 90 percent, to have at least 10 percent of their shares held by the public. 2010 FY

http://www.gettingmoneywise.com/2010/01/disinvestment-alert-list-of-state-run.html

http://www.gettingmoneywise.com/2010/01/disinvestment-alert-list-of-state-run.html

Disinvestment: Over the yearsGovernment disinvestment mechanism Year Target

amount(in crore)

Amount realised (in crore)

Enterprises disinvested *

1991 – 92 2,500 3038.00 30 (30)

1992 – 93 2.500 1912.51 16 (2)

1993 – 94 3.500

1994 – 95 4,000 4843.08 16 (7)

1995 – 96 7,000 362.00 4 (-)

1996 – 97 5,000 380.00 1 (-)

1997 – 98 4,800 902.00 1 (-)

1998 – 99 5,000 5371.11 5 (-)

1999 – 00 10,000 1573.78 5 (1)

2000 – 01 10,000 1868.73 3 (1)

*Enterprises disinvested for the first time given in brackets.

Source: Disinvestment in India, Sudhir Naib

Government disinvestment mechanism for total 60 companies

Source: Disinvestment in India, Sudhir Naib

Year Target amount(in crore)

Amount realised (in crore)

Enterprises disinvested *

2001 – 02 12,000 3130.94 6 (3)

2002 – 03 12,000 3265.14 5 (1)

2003 - 04 14,500 15,547 10

2004 - 05 4,000 2,764.87 3

2005 - 06 No target fixed

1,569.68 1


- -


2,366.94 1

2008-09 No target fixed

- -

2009-2010 No target fixed

4,259.90 -

2010-11 25000 - -*Enterprises disinvested for the first time given in brackets.

Disinvestment: Over the years

NTPC: Present stateNTPC Negative rate of growth last year.High dividend payout ratio (Rs. In Crs.)

http://capitaline.com/user/framepage.asp?id=1&treeid=1

Parameter/Year

2009 2008 2007 2006 2005 2004

PBIDT 13746.9 14317 12964.9 10666.5 9788.9 11282.6

Market Capitalisati

on

148583.19

162435.56 123475.76110489.1

670663.59 0

DividendPayout (%)

38.55 41.68 40.75 42 35.73 21.13

ROG-PBIDT (%)

-3.98 10.43 21.55 8.97 -13.24 79.81


Maruti Suzuki: Present state

Maruti •The government announced the sale of its remaining equity shares witnessing wild swings in the share market. FY 2006

•When the Cabinet Committee on Economic Affairs gave its go ahead to the sale on December 21, 2006 the company's shares were trading at Rs 926.

•From the highs of Rs 979 a share during the trading session on January 4 this year, it fell to Rs 755 on March 7, 2007.

http://www.rediff.com/money/2007/mar/16divest.htm

http://www.rediff.com/money/2007/mar/16divest.htm

Maruti Suzuki: Present stateMaruti High dividend payout ratio (Rs. In Crs.)


Parameter/Year

2009 2008 2007 2006 2005 2004

PBIDT 2433.3 3130.8 2588.8 2055.8 1797.7 1308.1

Market Capitalisati

on22394.19 23967.36 23682.77 25261.72 12157.75 14357.88

DividendPayout (%)

8.41 8.47 8.44 8.6 6.84 8.07

ROG-PBIDT (%)

-22.28 20.94 25.93 14.36 37.43 99.13


Criticism of Disinvestment

• The equity in PSUs essentially belongs to the people. Thus, in the absence of wider national consensus, a mere government decision to disinvest is not totally justifiable.

• It is not clear if the rationale for disinvestment process is well-founded. The assumption of higher efficiency, better management practices and better monitoring by the private shareholders may not always be true.

CASE STUDIESBALCO and ECIL

Coal India: Present stateCoal India Coal India’s proposed initial public offer by August 2010:Partha S Bhattacharyya.2003 YOY PAT (-)52%2004 YOY PAT 442% (Rs. In Crs.)

Economictimes.indiatimes.comhttp://capitaline.com/user/framepage.asp?id=1&treeid=1

Parameter/Year

2008 2007 2006 2005 2004 2003

PBIDT 3096.19 3216.43 2231.19 1582.7 1620.74 649.37

Dividend Payout (%)

78.81 57.45 82.32 21.09 8.22 0

ROG-PBIDT (%)

-3.74 44.16 40.97 -2.35 149.59 -41.17



Coal India: TurnaroundCoal India The turnaround in less than 2 years: of a revival strategy focused on: (a) enhancing production of high value coking coal and washed coal, (b) internalizing premium on coalmarketed to non-core sector through e-marketing (c) arresting / reversing the trend ofpersistent decline in coal production since 1999-2000.

Economictimes.indiatimes.comhttp://capitaline.com/user/framepage.asp?id=1&treeid=1



ECIL Turnaround• ECIL, which was a profit making body in 1992-97,

incurred a loss of Rs. 60 crore in 1998-99 and the net worth of the company got very badly eroded.

• timely strategic initiatives by the company resulted in an incredible turnaround

• It was made clear to all that no external help should be expected and that the intrinsic strengths of the company

• This was conveyed to head of trade unions and the senior managers across the organization

Iimm.org


ECIL Turnaround

• Empowering the Performers and Performing Divisions

• Rightsizing • Customer Focus • Memoranda of Understanding and the

performance of ECIL • Good Corporate Governance

Iimm.org


ECIL Turnaround

• The quality of common purpose and unity of command demonstrated by the company especially in times of crisis is adequate to validate the company‘s capability to combat competition and scale new peaks in performance.

• Stakeholders confidence boasted.

Iimm.org


BALCO Disinvestment• In February 2001, the Government of India approved the

sale of its 51% stake in aluminium major, Bharat AluminiumCo Ltd (Balco) to Sterlite Industries Ltd. (SIL), for Rs. 551.5 crores.

• BALCO was a profit making public sector company before that. It had a turnover of Rs.898 crores and a profit after tax of Rs. 56 crores.

• The deal witnessed fierce opposition from the opposition Govt. as well as the state Govt. of Chhattisgarh.

• The employees launched an indefinite strike protesting against the BALCO sell out, which lasted for 62 days.

The controversy at BALCO

• The then Chattisgarh Chief Minister Ajit Jogi accused the GoI of indulging in 'underhand dealings’to the tune of Rs 100 Crores; claimed that the sale of Balco equities would have fetched at least Rs 5,000 crore.

• Then opposition party BJP claimed that the deal would have easily fetched the GoI more that 1200 Crores.

• BALCO with a cash deposit of Rs 450 Crores and annual profit of Rs 100-150 Crores was being sold for a paltry Rs 551 Crores.

• To add to this, the bidding process was anything but transparent. Still the GOI is accused of not disclosing the final bid offers, even after the finalization of the bid.

Conclusions of Case Study

• There’s never been a clear direction to disinvestment as it has been subjected to the vagaries of politics of power.

• Its time a proper consensus is arrived through discussions on disinvestment aimed at restructuring Indian industry to make true the lofty visions of Jawaharlal Nehru and to continue growing at the same rate.

Learnings from the Cases• Disinvestment in India has never been an attractive idea

simply because successive governments have treated disinvestment merely as a tool to raise resources rather than as one designed to restructure the massive public sector.

• The fact that only in 3 of the 13 years budgetary targets were met show the ineffective implementation of this process by the government.

• Red Tapism and administrative loopholes have led to many controversies regarding disinvestment leading to many legal hassles and creating a negative image regarding disinvestment.

CONCLUSIONThe future of the PSUs in India

Is Privatization good or bad?

• General argument given for better performance of private sector is their ownership structure. But it is not fullproof– It does not explain the performance of Singapore Airlines and

SingTel, which are GLCs.– Most successful global corporations have dispersed ownership

with no dominant owner.

• There are numerous poor-performing PSUs. Indeed, some of the private sector units of today are ailing PSUs of yesterday.

PSUs and Recession• Being the largest commercial enterprises in the country, PSUs

provide a huge leverage to the government (their controlling shareholder) to intervene in the economy directly or indirectly to achieve the desired socio-economic objectives.

• At times, these objectives may be misplaced but at others especially in times of do-or-die situation such as in 2008, PSUs play a key role in steering the national economy in the right direction.

• LIC, one of the largest PSUs, was probably the only large investor in the Indian equity market when rest of the large investors preferred to stay away during the market turmoil of 2008

Flip Sides

Public sector is a mass employer

Trade unions and productivity

What’s making News?• It is encouraging to note that the government

made its intentions clear to roll back the fiscal deficit to 5.5% from 6.8% of GDP in FY 11.

• India has a digestible appetite to absorb the massive investments in PSUs via disinvestments mainly due to its 38 % savings rate.

• Disinvestment of 25000 crores in FY 2010 proposed by finance minister in Union Budget.

• Not so promising start with IPOs of NTPC.

The Verdict• In conclusion, the group opines that “performance” is the

criterion of judging the credibility of a PSU. But the government at the same time needs to adhere to a restrained calculated approach in going in for disinvestment and then “perish” i.e. privatization.

• India is a welfare state and the social strata need to be looked into as well.

• Hence, the PSUs should be pegged to perform or they have to meet up with the fate of privatization.

Thank youFEEL FREE TO ASK QUERIES…

Presented by:Group 4

Gokul Nath91019Gourab Kundu91020H.Sanchay Grover91021Harsh Aggarwal91022Harshdeep Garg91023Harshita Periwal91024

psu perform or perish

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