Are these cash cows serving question marks? - Views on News from Equitymaster

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Are these cash cows serving question marks?

Jul 8, 2010

No we have not lost out on sense of the English language. We are simply referring here to a model devised by Boston Consulting Group. Popularly known as the BCG model, this aims to classify companies based on their business status. It sorts companies based on their cash generating ability. Also it pin points on what level of maturity the business is in. But more importantly it tells you which businesses require more or less of your attention. This principle can be applied to businesses across categories. We thought it would be interesting to check out if the Indian government looks into the same. The Indian government needs to manage its cash flows in the form of dividend receipts from PSUs. These need to be utilised for more productive purposes. Be it in enhancing the business prospects of the PSUs or larger social causes.

The PSUs (atleast the 56 odd listed ones) have done a commendable job of paying back to the promoter year after year. As the chart shows, PSUs across sectors have raised their dividend payouts after a healthy performance in FY10. We therefore call them the government's 'cash cows'. As per the BCG model, a cash cow continuously provides positive cash flows. This can be then allocated to other divisions which are in need of investment.

Data source: CMIE Prowess

The biggest dividend paying PSUs like ONGC and SBI are cash cows by themselves. In fact, these individually contributed nearly 6-8% of the total dividend payouts by India Inc. over the past 3 years!

Data source: CMIE Prowess

However, the utility of this cash war chest does not inspire much confidence. There is very little clarity as to where this money is directed. The most probable option is the government's non plan expenditure items like subsidies and interest payments.

But what is also frightening to note is that there are plenty of unviable PSUs that are surviving at the cost of the profitable ones. These in BCG terms can be termed as 'question marks'. With the legacy of government ownership, these entities have very little incentive to improve profitability. Also most of their expensive resources lay underutilized over several years.

With the Indian government standing at the crossroads to improve its fiscal position, this is a serious matter to be looked into. Betting on fuel prices and telecom auctions may serve one time targets. But they are certainly not sustainable. It seems the government needs some deeper analysis to make better use of its cash cows.

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1 Responses to "Are these cash cows serving question marks?"

R Raman

Jul 9, 2010

2 things about this:
1) While the chart of how the dividends are increasing is good, is it adjusted for inflation? Otherwise it could paint a very skewed picture.
2) Arent the OMC companies being "subsidised" by GOI? So, while GOI is giving out with one hand, its receiving "dividends" on the other? Very Indian indeed!

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