Jun 10, 2005|
PSUs in the reckoning!
Government intervention continues to be pervasive in the Indian economy even if on a smaller scale than earlier. The need for the state to 'guide' the industry and economy in a way that the targeted growth is achieved remains. In today's context, state intervention means reforms in the existing PSUs and encouraging them to take advantage of their massive scale to reengineer India's industrial progress. In this backdrop, we had asked our investors as to what is their outlook towards PSUs going forward. A majority (58%) opined a positive view, while only 18% had a negative stance. The remaining (24%) remained neutral.
A historical analysis of the public sector undertakings clearly outlines the fact that the so 'perceived' laggards have done their best to discard this image over the past couple of years. Be in terms of shedding unnecessary baggage or improving efficiency levels, the PSUs have exhibited a noteworthy difference in their modus operandi. Some like SAIL (Steel Authority of India Ltd) have authored one of the most fascinating turnaround stories in the history of India Inc. Going forward, we see the picture shaping up no different. The reasons for the same could be cited as follows:
GDP growth: A GDP growth target of 8% cannot be achieved without the industry behemoths contributing to the same. Most of the public sector enterprises enjoy economies of size and scale. They not only have the capacity to cater to the incremental demand but also the reach to deliver the same. It is thus pertinent for these entities to run profitably and thereby contribute handsomely to the country's economic evolution. If one tracks the profitability margins of these entities over the last few years, the trend shows a steady northbound direction. Not to mention that most PSUs being index heavyweights, their profitability over the years has taken the Sensex to new heights.
Opening up of the economy: The constraints limiting the performance of PSUs had remained unassailable for a reasonable period. Nevertheless, the opening up of the economy coupled with higher FDI limits and stiff competition from private sector enterprises has forced the PSUs to roll up their sleeves. Liberalisation of the economy and inviting foreign participation in domestic enterprises has only accelerated the process.
Operational reforms: Operational flexibility and autonomy being paramount for improved efficiency, the government has slowly but steadily accorded these to the PSUs. PSU banks, for example, are now allowed to frame their own HR policies and undertake cost cutting initiatives. To induce better governance and operational transparency, Securities and Exchange Board of India (SEBI) has also recommended that 50% of the board of directors should be independent candidates. Also, the ad hoc group of experts (AGE) on empowerment of central PSUs has recommended that boards of profit-making PSUs be allowed to reduce government stake up to 51% by raising capital from the market. The expert group recommended that the navratnas, mini-ratnas and public sector enterprises with a three-year profit making record should be allowed to reduce government stake to 51% with the consent of Parliament. Partial privatisation is expected to straighten out the creases in their operational techniques. Such reforms are thus directed towards making the PSUs competitive to their private sector counterparts.
Dividend payout: PSUs have, are and will remain attractive 'dividend stocks'. This is because the government garners a major portion of its revenues from their dividend payout. It will thus be in the interest of the government that the PSUs continue to post robust bottomline and share a generous portion of it by way of dividends.
The PSU sector is an interesting story unfolding. If the India growth story is to hold true then these entities will be among the first ones to bask in its glory. With scale being pertinent for survival and consolidation being the norm of the day, the elephant sized PSUs stand to benefit. All that needs to be seen is whether they can capitalise on the economic buoyancy and succeed in regaining their lost glory.
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