BUSINESS

How to judge a PSU

By Shyam Ponappa
January 05, 2006 12:27 IST

PSU profits: There is a tendency now to worship the private sector. Mention PSUs, and the impressions are "loss-making" and "inefficient". So it is surprising to find the most profitable companies in India are PSUs (FY04). The table gives the top tier ranked by net profit in FY04 in the BS1000 and the Forbes Global 2000 with their return on capital employed (RoCE):

Eight of the top 10 were PSUs, with seven having over 15 per cent RoCE. The exception is a bank, where the criterion is return on assets. Some may demur that administered markets skew PSU profits.

FY04

Company

BS-1000

Forbes 2000

RoCE%

ONGC

1

1

31.09%

Indian Oil Corp

2

2

29.68%

State Bank of India

NA

3

NA

Reliance Industries*

3

4

15.47%

National Thermal Power

NA

5

17.24%

Steel Authority of India

4

6

25.36%

Bharat Petroleum Corp

5

7

33.07%

Hindustan Petroleum Corp

6

8

34.72%

Gas Authority of India

7

9

32.87%

Tata Steel*

8

10

38.18%

ITC Ltd*

9

11

39.58%

Hindustan Lever*

10

13

60.30%

While this is true, and the RoCE is not a life-cycle criterion like net present value, the fact is these entities show good returns on capital. What's more, their performance could possibly be much better. There are, however, plenty of loss-making PSUs wasting resources, but that's another discussion.

Performance & ownership: Focusing on the profit makers and the ownership conundrum, one would think our long-term interests are best served by maximising profits with due care for our people, their well-being, and our environment.

Yet, much effort and time centre on privatising government-owned companies. The effort, presumably, should be to strengthen productive enterprises. Enterprise ownership is relevant only in four senses:

The crucial requirement of most enterprises is to generate legitimate profits, operating in the long-term interests of all stakeholders, which includes society beyond the shareholders, employees and management.

This may be contested now in India, where privatisation is considered the silver bullet. However, as with passive smoking or polluting industries, we need only recall that enterprises functioning in a regulatory-cum-social environment collectively result in enterprise performance as well as the total impact on society, to accept that enterprises affect all stakeholders, not just shareholders.

Human resources: Once capital and land are available, the ultimate resource is people. Our PSUs have prime human resources: trained and skilled engineers and managers with expertise.

If you doubt this, think of the PSU alumni who contributed to the achievements of Mittal Steel, Reliance, and international and domestic banks, e.g. HDFC, started by HT Parekh, who once headed ICICI. It must have been difficult, but it was possible.

Commercial logic: There is compelling logic for vertical integration in sectors like energy, and for public-private partnerships, e.g. Boeing, Airbus, and Embraer. Energy security is accepted in the real world of assertive national interests, non-free trade, and material transaction costs, although academics might question it (The race for oil has just begun).

There are also commercial considerations of size and capital access, opportunities of scale or buying power, and the ability to fully hedge long and short positions that provides competitive advantages.

So, there are reasons not to privatise simply to rearrange ownership, just as blanket opposition to diluting government stakes is misplaced. We should hold our dogmatic biases - the Left, Socialists, private sector votaries - and focus instead on ends in the public interest, and performance (how to get there).

Likewise, we can shoot for sectors like shipbuilding, turbines, or aircraft only with government backing, e.g. as Brazil's Embraer has proven.

Strengthening PSUs: How can we strengthen good PSUs? Start from first principles:

Any dogmatic approach will be damaging in the long run. Ownership is not the issue; setting up proper systems and performing well are.

* Table: Those marked in red are not PSUs

Shyam Ponappa
Source:

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