Indias Best Public Sector Undertakings

PSU Performance Under The Scanner

Dalal Street Investment Journal has returned with the much-awaited DSIJ PSU Awards. Public sector undertakings are primarily government-owned corporations wherein 51 per cent or more of the paid capital is held by the central government or by any state government or partly by the central government and partly by one or more state government. In India, PSUs play a versatile role, which leads to a strong foundation for industrial development. Focusing on infrastructure development and expansion, these corporations aim to accelerate economic growth.

Hence, since 2009, Dalal Street Investment Journal has been presenting its flagship PSU Journal to its readers to highlight the significance along with the efforts and strong achievements of the public sector undertakings (PSUs). The BSE PSU index is led by companies in cyclical sectors like financial, materials, industrials and energy. These sectors faced a disproportionate brunt of the pandemic in the previous fiscal year but recovered decently in 2021. In general, the improvement in activity levels of the business and higher realisations have helped cyclicals. The corona virus variant and inflation concerns are likely to lead to economic buoyancy over the next three to four years and this is likely to help the PSU sector – which is dominated by cyclical industries – to report robust growth in earnings. 

To brief about the near-term developments expected in PSU space, by the end of the year 2022, the government is likely to privatise five public sector undertakings. A roadmap is already been laid for disinvestment in all non-strategic and strategic sectors. Among the companies to be disinvested this year, the three companies on the table are Bharat Petroleum Corporation Ltd (BPCL), RINL and Pawan Hans. The government also plans to offload around five per cent of its stake through LIC IPO which is likely to come later this month. The government has set a disinvestment target of ₹ 65,000 crore for FY22-23. For the financial year 2021-22, out of ₹ 1.75 lakh crore divestment target set for the fiscal year, only ₹ 78,000 crore could be achieved, which is a reduction of 55.4 per cent. 

In the current environment, when interest rates are climbing globally, value stocks are expected to do well and the public sector bears a yield of about 6-8 per cent. In this PSU issue, we have analysed the performance of PSUs over the last three years and five years. We could sum up that as compared to a performance on a one-year basis, PSUs were not able to perform that impressively on a three- year and five-year basis. Proceeding with this volatile environment, we hope PSUs opt for a strong and positive trend game. I also take this opportunity to thank the participants and our valuable readers for being able to present to you the PSU special issue. 

Yogesh Supekar
Executive Editor 

PSU Performance Under The Scanner

If we consider the performance of the PSUs on a one-year basis, the average returns delivered by the Maharatnas have been impressive at 33 per cent. However, when we consider the performance of Maharatnas on a three-year and five-year basis, the performance is not something that investors can be proud of 

Gross Domestic Product (GDP) is made up of consumer spending, investment spending, and government spending and net exports, which is why it depicts an all-encompassing view of an economy. As a result, it gives investors’ insight into the economy’s trajectory by comparing GDP levels as an index. GDP provides investors with information on the state of the economy, which helps them manage their portfolios. GDP is a solid measure of an economy, and statisticians and governments are working to discover ways to increase GDP and make it a more complete indication of national wealth as research and data quality improves. 

India’s GDP is expected to expand at a rate of 8.9 per cent in 2021-22 compared to a decrease of 6.6 per cent in 2020-21. In value terms, GDP stood at ₹ 38,22,159 crore during October- December 2021-22, higher than ₹ 36,22,220 crore in the corresponding period of 2020-21. However, global rating agencies have currently downgraded the country’s GDP growth to 7.5 per cent from 8 per cent due to the uncertainties that India will face as implications of the war between Ukraine and Russia unfold. Primarily, due to the ongoing war between Russia and Ukraine, crude oil prices have reached an all-time high, creating a supply deficit in most of the countries that import crude oil and are dependent on it. 

Also, the world is facing higher levels of inflation due to the geopolitical uncertainty and the side-effects that could happen because of the sanctions imposed on Russia, leading to a rise in the prices of aluminium, coking coal and steel. This has been affecting the metal sector on the bourses. The average market capitalisation of the 10 Maharatna-listed companies was ₹ 10,25,440.51 crore as of April 13, 2022 while the total market capitalisation was ₹ 1,02,544.051 crore. On an YTD basis, the average performance of the Maharatnas is 5.66 per cent. The Maharatnas have failed to outperform the key benchmark indices on an YTD basis. 

If we consider the performance of the PSUs on a one-year basis, the average returns delivered by the Maharatnas have been impressive at 33 per cent with ONGC being the topperforming Maharatna gaining by more than 70 per cent. However, when we consider the performance of Maharatnas on a three-year and five-year basis, the performance is not something that investors can be proud of. Over a period of three years, the average return generated is 10.89 per cent wand that over a period of five years is a negative 2 per cent. Out of the 10 Maharatnas listed, National Thermal Power Corporation has been a consistent performer with average sales of 15.8 per cent and average earnings of about 26 per cent on QoQ basis. 

However, on a yearly basis, net sales have varied to 9.27 per cent and the earnings have been around 51.73 per cent for the past three years. The total market capitalisation of the 13 Navratna companies stood at ₹ 3,39,180.9 crore whereas the average market capitalisation is at ₹ 26,090.84 crore. As far as the performance of Navratnas is concerned, on an average the 13 listed Navratanas as mentioned in the table below have delivered 7 per cent while in one year the average return is 42.66 per cent.

Over a three-year period, the Navratanas have delivered 65 per cent returns on an average. In a five-year period, the average return generated is 6.15 per cent. The best performing Navratna has been the Shipping Corporation of India whose sales on an average grew by 34.66 per cent on QoQ basis while the profits remained on the higher side at 66 per cent on QoQ basis. On YoY basis the sales remained bearish on an average while the net profits increased by almost 100 per cent on YoY basis. The following tables give a better perspective on the performance of both the Maharatna and Navratna listed PSEs. 

Interview

"We have surpassed all targets and expectations"

Rated ‘excellent’ for 11 consecutive years, Rail Vikas Nigam Limited has pioneered new business models for PPP-led growth through SPVs along with high-speed and semi-speed projects, execution of metro projects, tunnelling works, turnkey projects and has now also bagged contracts for other multi-modal allied infrastructure projects, shares Director (Operations) Rajesh Prasad in this exclusive interaction with DSIJ 

In Q3FY22, the consolidated sales of Rail Vikas Nigam Limited (RVNL) rose by 35.28 per cent to ₹ 5,049.24 crore as against ₹ 3,732.44 crore recorded in the same quarter last year. What factors have helped you outperform?

Before I elaborate on the goals and highlights of FY 2021-2022, I wish to stress upon one defining feature of RVNL that has helped us beat the odds in the past few difficult years i.e. our culture of shared values, teamwork and focussed approach, which together work as our core strength and underpin our success story. Our officers and staff did an extraordinary job, even going beyond the call of duty, demonstrating that we are a purpose-driven company. We also used the crisis period as opportunities which ultimately led to excellent results. Above all, the top management maintained a close connection with the ground level. 

We, at RVNL, deployed multi-pronged initiatives to adhere to our timelines, used IT platforms extensively and geared up to deliver as per public expectations with regard to our set targets. There were bar-bell strategies and tactical approaches as the government policies and perspectives underwent paradigm shifts with regard to allocation of works to PSUs. At this point, new forays meant more risk-taking. But we took the risk, and it may be heartening to note that in the new avatar we are ensuring that our judicious planning supports the risks. Readers may recall that RVNL started as a breakthrough concept to meet the infrastructure deficit in the country, assigned to complete projects of the Golden Quadrilateral, besides other capacity-creation and augmentation of Indian Railways. 

RVNL also pioneered new business models for PPP-led growth through SPVs, took on PMCs for high-speed and semi-speed projects, execution of metro projects, tunnelling works, turnkey projects and have now also bagged contracts for other multimodal allied infrastructure projects. In a very short period, we have consolidated our position as an infrastructure leader and a blue-chip company in the segment of railway infrastructure. It is a matter of profound honour for me to share on this forum that RVNL had clinched the Gold Award by SKOCH Group on 9th April 2022 for its SPV, viz. Kutch Railway Company Limited which is also the pioneer Public-private partnership project in the rail sector in the country besides the SKOCH Silver Award for its transformative performance during Covid. Business-wise, the smooth flow of working capital, our policy of empathy when our business partners faced a liquidity crunch and the accelerated digitalisation within the organisation added resilience to the company. 

Are you implementing any cost rationalisation measures to safeguard margins from cost-push inflation? What are the other challenges you are currently facing?

As a public sector company, we follow all prudential norms and have a system of pre-vetting of our estimated expenditures and cost assessments within the organisation. Besides, the fact that these are subject to periodical audits and other checks make our due diligence so much more rigorous. Still, in the face of an inflationary impact, we would like to assure you that we have developed appropriate contracting strategies to protect our bottom-line. In fact, even in the pandemic times, project execution never came to a halt due to our intelligent inventory management systems, increased transparency and appropriate flexibility in execution of agreements. 

So far as systems of construction are concerned, our expenditure protocols always favour the locals, which have stood the test of time. We have leveraged the strength of the ‘Make in India’ campaign, as for example, our steel component purchases for various projects. Yes, with the emerging global uncertainties and threats to supply chains, we would be vulnerable to cost-push inflation since we are in the construction industry. So far as the business contracts that we have entered into are concerned, we wish to state that we are fair-minded and will work for viable solutions. We do not foresee any major challenges that would seriously impact or threaten our ability to deal with them. 

Can you throw some light on your overall order book and execution?

I am happy to share with you that even in the recently concluded financial year we have exceeded our physical and financial targets. We have surpassed all targets and expectations from the Ministry of Railways. Interestingly, as investors may see, we have grown even during the economic downturn in the country and specifically in the construction industry. I will touch upon the trend as the exact figures will be released after our Board of Directors’ meeting that will be convened soon. In line with our expectations, our turnover registered ₹ 12,944 crore in the nine-month period of FY 2021-2022 as against ₹ 9,825.77 crore notched for the corresponding period during FY 2020-2021. 

Similarly, our Q3 results also recorded sustained positive momentum with PBT at ₹ 932.76 crore as against previous fiscal’s ₹ 729.54 crore. Our PAT recorded ₹ 715.5 crore as compared to the previous fiscal’s ₹ 609.79 crore. Our SPVs, four of which conform as models of our continued success, notched PAT of ₹ 192.94 crore as against ₹ 36.38 crore registered during the previous fiscal. So, this is our Q3 story and I firmly believe that a similar growth story can be traced as regards the upcoming Q4 result which will spell new benchmarks and first-time records. I am sure that this would be happy news for all our shareholders too. Our market capitalisation has met the target set by the Ministry of Railways and this is again happy news given the public expectations as well as the plans envisaged under the National Infrastructure Pipeline. 

Our physical performance has been commendable with completion and commissioning of 116 projects for the Indian Railways. And through this we have achieved a total of 14,942.83 km of railway lines with RE projects notching 3,396.91 km. We have entered into new business ventures like highway projects and development of other logistics solutions. RVNL has inked MOUs with several national and international agencies to seek and share potential opportunities in building a sustainable infrastructure for new-age India and to implement the latest technologies in railway track maintenance. Our order book now stands at ₹ 60,000 crore and as a proven industry leader in the infrastructure space, we are optimistic in our outlook and expect to bag more orders in the year ahead. 

Again, recalling our strengths in the field of PPP-led project execution i.e. through special purpose vehicles (SPVs), we are a proven long-term value-creator for the markets. Through this PPP model we have generated ₹ 83,000 crore of revenue for Indian Railways without any additional investment. I am happy to share that we are working to create new SPVs, as for example, the Pachhwara coal block evacuation line (60 km) and the Sardega-Pelma line (35 km). RVNL has also entered into an MoU with Jaykaycem (Central) Limited, a wholly-owned subsidiary of JK Cement Limited, for development of approximately 50 km of new railway line between Devendra Nagar and Puraina in West Central Railway in Madhya Pradesh through the SPV mode. We have the confidence to deliver in all business contexts. 

What are your key growth triggers?

As I often cite in my interviews, RVNL doesn’t think about growth for growth’s sake. It is a purpose-driven company, which is also the reason why the company is growing faster than its peers and we expect to have higher profits than our peers. Our equity prices are up today as a result of our performance over the years and this will show a steady climb. Globally, if you see, the pandemic was the time when companies decreased their spending relatively. But at RVNL we never lost sight of our targets and so our capital infusion into projects was sustained and enlarged, which is also why we brought in large value contracts in place. It is noteworthy to mention that during FY 2020-2021, with the digital roll-out and digital mode of tendering process, RVNL awarded contracts for all its planned projects. And now that economic recovery has started, we shall consistently ramp up our capex spend in keeping with the through cycle strategies. 

What are your top three strategic priorities?

Our no-holds barred approach in delivery of all our projects while adhering to timelines over the years has firmly established our credentials. Rail Vikas Nigam Limited has consistently been rated ‘excellent’ in the central public sector enterprises’ ratings by the Department of Public Enterprises. This is a distinction that the company has achieved for the last 11 successive years and has consistently retained its first position in the country amongst railway PSUs. We have a broad-based approach, but I would like to highlight three priorities that are central to RVNL:

1. Setting the bar high is and will be our foremost priority. We will add our heft through varied strategies to trigger our growth targets and put our growth aspirations high vis-à-vis our peer companies. We see big opportunities in the PM Gati Shakti National Master Plan as well as its precedent, the National Rail Plan.

2. We are definitely pursuing new business opportunities through our tie-ups with all lead business companies both in the public and private sector. Further, RVNL has been a pioneer in the implementation of railway infrastructure in the PPP mode and our efforts will continue in that direction.

3. The third and the most important and topical priority of the times is working in tandem for a green economy. Needless to say that all projects are intrinsically resilient infrastructure projects and we are working for the phased transition to a green economy. 

Rajesh Prasad is Director, Operations, Rail Vikas Nigam Limited (RVNL). He is an Engg. Graduate from IIT Kanpur 1983-1987 & an IRSE Officer of 1988 exam batch with more than 32 years of service in Indian Railways & in RVNL

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PSU Ranking Methodology 

Maharatna/ Navratna/Miniratna:
The basic parameters to assess the winner companies are in terms of Balance Sheet size, net sales and profitability. These parameters are used to evaluate the companies in terms of size. To calculate the final rank, major weightage (30%) is given to Operating Profit and Net Sales each and then the remaining weightage (20%) is given towards Balance Sheet size and Net profit. The composite ranking provides the basis of deciding the winner.

For selection of the most efficient companies, we evaluated the operational efficiency of the company. Hence, we have considered parameters like profitability per employee, cost of employee as against sales, working capital efficiency and leverage ratio. These parameters reflect the level of efficiency the companies are delivering. Equal weightage has been given to all the four parameters to arrive at the final ranking.

For selection of the fastest growing companies, the emphasis is on the growth achieved during the last five years, as compared to the peers. For this, we consider the growth in sales, net profit and operating profit. To weave in the operational performance compared to the capital invested, we also evaluate return on net worth and return on capital employed. The compounded annual growth for last 5 years relatively depicts a true picture of the company in terms of its overall growth. All individual parameters are given appropriate equal weightage to calculate the final rank.

Banks:

Banks are ranked on comprehensive financial parameters. The financial performances are grouped in three major categories namely size, growth, and efficiency. Again, these major categories are subdivided and test various critical parameters to judge the performance of PSU banks for the fiscal year.

While considering size we subdivided it into size of total assets of bank, total income, operating profit, and net profit. For growth we have considered CAGR in net interest income, and balance sheet size of last 2 years ending FY21. For most efficient category we have considered business per employee, profit per employee and Return on Asset (RoA) for FY21. All the individual parameters are given appropriate weightage to arrive at final ranking.

Insurance:

In insurance, we are keen to see that the growth in premium is balanced with the growth in claims. Also, we rank the companies to reassure that the best Balance Sheet is rewarded so that the liabilities are sufficiently provided by the reserves and balances.

To download  'PSU Awards'  Click Here 

To download  'PSU Databank'  Click Here