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Cover Story
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Dressing up for the marathon ahead
Indian psus have followed an optimistic trajectory post-liberalisation and have seen some vital successes through well-timed and executed strategic realignment. Virat Bahri of B&E brings out the lessons from these successes and also on how these psus can keep the growth story intact going forward and fulfil India’s economic objectives with their private counterparts
Issue Date - 19/01/2012
If it’s about state-owned enterprises versus private companies, the debate is not new. It only gets reignited from time to time, as it did in the aftermath of the recent global recession. A clear case against capitalism and its potential perils emerged as a result. Government spending is a must for objectives like social welfare and equitable growth, but those of us who have lived through the not-so-exciting ‘80s also know how excess public sector intervention in an economy can rob a nation of its dynamism & growth potential. A general consensus theory that comes up is that relatively high loss making sectors/sectors with high gestation periods, and especially where social welfare is the larger objective, the public sector should have a considerable say (areas like hospitals, mass transportation, et al). On the other hand, public sector should also have a huge role in extremely high profit making sectors like oil & gas (which have the other indisputable logic of national interest), mining, banking et al, so that too much money doesn’t get concentrated in the hands of a few individuals. And the private sector must ideally play a greater role between these extremes.

In India, there is often a tendency to relate PSUs to the word ‘public’ more than anything else. ONGC, besides being the most profitable PSU in India, is representative of the dichotomous viewpoints that we generally carry about PSUs in India. On one end, it is the view that they are family silver, and must be selectively milked. Indeed, ONGC is also on the divestment wish list of the central government, which recently delayed ONGC’s Rs.120 billion FPO to divest 5% of its stake in the PSU, a critical part of its overall divestment plan. On the other hand, ONGC is also expected to shoulder huge strategic responsibility for the country in a sector where geo-political equations get more and more daunting. An instance is the current impasse over South China Sea waters, where ONGC Videsh is planning to go ahead with offshore exploration much to the chagrin of China. Analysts caution that while diversification should be pursued, the end sought must be strategic rather than politically opportunistic.

The story of PSUs in India carries a legacy of its own. Just like the family owned enterprises of their day and age, these PSUs have travelled an arduous journey to be able to stay competitive post-liberalisation. Some of them stayed stuck in the quicksand of their own legacies to the end, some moved on with laudatory success and some are still struggling. From FY 2000-01 to FY 2009-10, the number of operating Central Public Sector Enterprises (CPSEs) has come down from 234 to 217. However, the aggregate turnover has increased to Rs.12.35 trillion in FY 2009-10, a CAGR of 11.64% over a nine year period (Public Enterprises Survey). Total profit of profitable CPSEs was Rs.1.08 trillion in the same year (CAGR of 16% over the same period). Loss making CPSEs had seen loss increase by a CAGR of 2.36% during the period to Rs.158.42 billion in FY 2009-10. The growing financial clout of top enterprises has been recognised through the creation of the Maharatna category of PSUs, which has five members currently – ONGC, Indian Oil, SAIL, NTPC & CIL. They can now decide on investments upto Rs.50 billion without government permission compared to Navratnas, whose upper limit is Rs.10 billion.

Being on the other extreme, these names wouldn’t ring a bell, but they indicate that the government’s ongoing efforts to rescue PSUs at the ‘bottom of the pyramid’ seem to be working in part. In FY 2008-09 itself, 11 Indian PSUs registered a turnaround (profitable for 3 years in a row) including Heavy Engineering Corporation (HEC), BBJ Construction Company, Bharat Pumps and Compressors, Braithwaite and Company & Cement Corporation of India. The Board for Reconstruction of Public Sector Enterprises (BRPSE) set up in 2004 has received 67 cases since it started. It recommended 59 for revival, out of which 45 would be revived through restructuring, 9 would be revived via takeover by government/JV with state PSEs and 5 are cases for merger/takeover with total cash & non-cash assistance of Rs.348.61 billion. The overarching theme of revival has been stricter adherence to balance sheet discipline.

Post-liberalisation, turnaround has also been a recurring theme for quite a few PSEs, which have been stung by the competition and responded with dramatic turnarounds that only look believable in retrospective terms. SAIL itself is a fascinating example, as it was facing a net loss of Rs.15.74 billion in FY 1998-99. A comprehensive rationalisation of production processes was done, the product mix was strongly realigned and production of saleable steel products was ramped up. Within 6 years, the company had posted an impressive profit of Rs.68.17 billion. BHEL had a net sales of Rs.68.96 billion in 1998-99 and a net profit of just Rs.5.99 billion. Once the central government passed the Electricity Act, the company was faced with a tremendous surge in demand and was found wanting in terms of manpower and capacity. Besides, Chinese competition has come in droves, buoyed by the Chinese government’s strategy of having an undervalued yuan. BHEL aggressively enhanced capacity and scope of business. Though problems persist, BHEL posted a revenue of Rs.424.95 billion (CAGR of 16.36% since FY 1998-99) and a net profit of Rs.60.11 billion (CAGR of 21.18% since FY 1998-99) in FY 2010-11. ONGC was often criticized for its inefficient practices and relatively staid approach. It is well known how the company transformed under the aegis of erstwhile Chairman (late) Subir Raha and hasn’t looked back since. When he joined, the company was facing depleting production and reserves. He led the company on an expansion spree and also promoted better utilisation of existing assets. Oil & Oil equivalent gas production of ONGC was 62.07 MMtoe in FY 2010-11. Its net profit of Rs.189.24 billion placed it on top of the B&E Power 100 List for the year. State Bank of India (SBI) was similarly losing market share rapidly to private and foreign banks. The challenge was to shake up an institution with 2,00,000 employees from its stupor. Under ex-Chairman O. P. Bhatt (who joined in 2006), SBI took a unique initiative of stopping the VRS scheme so that they would not lose valuable talent to private enterprises. In addition, they ramped up process efficiency by manifolds and Bhatt made the effort to align the organization towards a common vision and a common set of objectives, primary being their drive to gain favour with mid to large enterprise accounts and with the growingly young workforce in India. The State Bank group’s advances stood at Rs.9.94 trillion for FY 2010-11 (growth of 15.87% yoy) while deposits stood at Rs.12.45 trillion (growth of 12.43% yoy).


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