India's Best Public Sector Undertakings

Preface

PSUs Grab Attention

Dalal Street Investment Journal is back with its much-awaited DSIJ PSU Awards. The PSU sector has undoubtedly always been an important protagonist in India’s development story. Hence, since 2009, Dalal Street Investment Journal has been presenting its flagship PSU Journal to its readers to commemorate the efforts and brilliant achievements of the public sector undertakings (PSUs). These undertakings are primarily government-owned corporations wherein 51 per cent or more of the paid share 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 governments.

In the last one year, India’s economy has witnessed many shifts with the impacts of the corona virus pandemic threatening to weaken the PSU sector. At such times, the Indian government has offered tremendous help to boost the sector. Privatisation in the PSU sector continues to unlock the sector’s growth potential with investors cheering such policy shifts. While domestic benchmark equity indices witnessed all-time highs and continued to be in a swing momentum, the drop in valuations of PSU stocks provided investors with opportunities for long-term bets in this space.

PSU companies are generally considered to be dominant in several critical sectors of the economy such as defence, power, engineering, mining, oil and gas, insurance, etc. Some of them even operate in regulated sectors with low earnings’ risk. These companies continue to pay high dividends. Certain companies offer dividend yields in high single digit to low double digits as well. PSUs have an advantage that they dominate their respective industries, with little or no competition from the private sector. Having large scale business set-ups, PSUs have built their businesses over a period of time where the private sector is yet to make a mark or has not met with material success.

On the other hand, PSUs are ahead of competition due to their decades of experience and it would take an extremely long time for others to catch up. PSUs have the advantage of greater sustainability by staying away from areas where competition from the private sector can take away market-share fairly rapidly. Additionally, the growth space for these companies lies in strong balance-sheets, attractive ROEs in their respective industries as a result of their strong position, witnessing favourable policy developments and ceaseless support from the government.

Undoubtedly, business leaders of PSU corporations have earned utmost respect from all since they strive to maintain a positive growth trend for their respective corporations even while being faced with several financial as well as economic hurdles. Hence, it has been our greatest pleasure to be able to interact with such eminent business leaders. As we move forward while battling this pandemic, we hope PSUs continue to post an unwavering growth trend. 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 

To download the Full List of  Roll of Honour Click Here 

To download Financial Data Bank PSU Click Here 

India’s Best Public Sector Undertakings

Public Sector Enterprises – Central To India’s Growth Story

Holistic development of any economy depends on the progress of key strategic industries. PSEs are companies that operate in key strategic sectors in India that provide much needed development, thus facilitating superior GDP growth for India. The DSIJ team discusses the performance of Maharatnas and Navratnas to help us understand the contribution of key PSEs in today’s dynamic economic environment

The Government of India has a dual task to keep the GDP growth intact while also controlling the strategic industries for security purposes. Infrastructure is one such sector that is crucial for the holistic development of any country, especially a developing nation like India that aspires to record doubledigit growth in terms of its GDP. The government has continuously been taking steps to boost industrial growth, including the infrastructure sector which, inter-alia includes putting in place a policy framework to create a favourable business environment, strengthening infrastructure network and ensuring the availability of required inputs.

For instance, foreign direct investment (FDI) policy and procedures have been simplified and liberalised progressively. The government has also taken up a series of measures to improve the ease of doing business. Playing an important role in this space are the public sector units that may be classified as central public sector enterprises (CPSEs), public sector banks (PSBs) or state level public enterprises (SLPEs). CPSEs are administered by the Ministry of Heavy Industries and Public Enterprises. The Department of Public Enterprises (DPE) is the nodal department for all the CPSEs. DPE formulates policy regarding CPSEs. These policies are mainly related to performance improvement and evaluation, autonomy and financial delegation, and personnel management.

The importance of the CPSEs cannot be undermined. If one looks at CPSEs like BHEL, for example, it is India’s largest manufacturing and engineering enterprise of its kind with a mission to make the nation self-reliant in power and industry. BHEL is also India’ s second largest employer in the capital goods’ industry and is one of the largest contributors to the country’s total installed conventional power generation capacity with 53 per cent share. With its pan-India presence and 18 manufacturing units and eight service centres, BHEL is an important entity playing a crucial role in the development of the country. Looking at the size and the importance or contribution of the CPSEs, they are classified as Maharatnas and Navratnas. BHEL is definitely one of the Maharatnas that India can be proud of.

Performance of Maharatnas

The table below highlights the performance of Maharatnas on the bourses.

The average market capitalisation of the 10 Maharatna listed companies was Rs 77,172 crore as on May 2, 2021 while the total market capitalisation was Rs 7,71,726.88 crore. On YTD basis the average performance of the Maharatnas is 14.66 per cent. Clearly, the Maharatnas have outperformed the key benchmark indices on YTD basis. If we consider the performance of the PSUs on a one year basis, the average returns delivered by the Maharatnas is impressive 53 per cent with SAIL being the top-performing Maharatna gaining by more than 274 per cent. However, when we consider the performance of Maharatnas on three 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 negative 16 per cent and that over a period of five years it is a miniscule 16 per cent.

The table highlights the earnings’ performance of Maharatna companies. The average sales increase on QoQ basis has been 19 per cent for the Maharatna companies while the profits have increased by 67 per cent on QoQ basis. However, on YoY basis the sales declined by 14 per cent and the profits decreased by 24 per cent.

Performance of Navratnas

As far as the performance of Navratnas is concerned, on an average the 13 listed Navratanas as mentioned in the table below have delivered 14.70 per cent while in one year the average return is 66.78 per cent. Over a three-year period the Navratanas have delivered negative 10.54 per cent returns on an average. In a five-year period the average return generated is 11.61 per cent. The sales on an average grew by 11.80 per cent for the listed Navratana companies on QoQ basis while the profits remained flat on QoQ basis. On YoY basis the sales remained flat on an average for the 13 listed Navratna companies while the net profits increased by 8.05 per cent on YoY basis.

Interview NMDC Ltd

“We Expect A Healthy Demand For Iron Ore To Continue This Year”

The second wave of the pandemic in India has no doubt been a major setback but Sumit Deb, Chairman and Managing Director, NMDC Limited, believes that the postpandemic period will be one of immense growth opportunities

What are your concerns with this new wave of the corona virus and how will it impact business?

Undoubtedly this has been disappointing and is a cause of concern, not just for business but the country at large. We were gearing up as a country to put this behind us with a massive vaccination drive. From the company’s perspective we are better prepared for any pandemic-related adjustment we may need to make. I would like to take this opportunity to thank everyone at NMDC and our stakeholders for the great tenacity they have shown to get us through the first wave. Last year’s lockdown cost us two million tons in production, revenue of about Rs 950 crore and PBT of around Rs 430 crore.

Nonetheless, overcoming the unprecedented challenges, we ended FY21 with 34.11 million tonnes, an 8 per cent increase in production over the previous year. Mining is an essential activity, involving a wide range of stakeholders. We depend as much on the workforce at the mine site as on the free movement of trucks and unhindered demand for steel. Like everyone else we have learnt to walk a tightrope, balancing lives and livelihoods and hope to be able to apply those lessons in this new phase of the pandemic.

What is your outlook on iron ore prices?

We expect a strong demand and iron ore prices to stay around their current rates for the short term. Price is determined by market forces and demand and supply situation. If you look at steel, prices have gone up 20-25 per cent and margins have been very strong. There was room for NMDC to increase prices. Considering the times, and our responsibilities as a PSU, we remain more affordable than many of our competitors. One of the main reasons for the rise in iron ore prices last year was the shortage on account of delays in operationalisation of auctioned mines in Odisha coupled with more than 80 per cent increase in export of iron ore from the country. The situation has improved considerably and will be further remedied once the recent reforms passed by the Ministry of Mines are implemented. This includes provisions of deemed clearance, allowing captive mines to sell the ore in the open market and allotment of mines to PSUs. The last is a significant opportunity for NMDC and we are in talks with the state and centre for new mining grants.

What are your internal growth targets and how do you see the margins improving in the current financial year?

We have set a production target of 42 million tons for FY22 and we are aiming for more than 20 per cent growth this year. Our main leases, both in Chhattisgarh and Karnataka, have been extended. The certainty of tenure ensured by the Ministry of Mines, Ministry of Steel and respective state governments encourage us to commit to our plans for these projects. By FY25 we expect to increase our iron ore production capacity to 67 million tonnes annually through expansion of existing mines and acquisition of new greenfield projects. Majority of this growth in production over the next 3-4 years shall be attributable to technology, infrastructure development and expansion plans of the company.

We are constructing additional screening plants to increase processing capacity and rapid wagon loading system, slurry pipeline from Bailadila to Jagdalpur in the first phase and up to Vizag in the second along with doubling of rail line from Kirandul to Vizag to improve the evacuation capacity. We are also implementing technological interventions across the supply chain – ERP, mine transport surveillance system, fleet management system, vision enhancement system, automatic sampler, conveyor belt monitoring system, etc. – to name a few. We have also decided to develop intermediate stockpile to better service the customer, particularly during monsoons when evacuation becomes a challenge. One such stockyard has been established in Kumarmarenga near Jagdalpur and another is currently under construction near Bacheli.

Are you looking at other minerals and geographies?

We have plans to expand horizontally into other minerals apart from iron ore and diamond, vertically into pellet and steel making as well as geographically into other countries. While scaling up pellet production at Donimalai, we are also setting up a 2 MT pellet plant at Jagdalpur, Chhattisgarh. NMDC has already set up a beneficiation plant for processing low-grade ore, including slime at Donimalai. We will be adding 4 MTPA and 6 MTPA beneficiation plants at the Bacheli and Kirandul complexes. We have been allocated two coal deposits in Jharkhand, Tokisud and Rohne and are in the process of making them operational very soon. We are also a majority shareholder of Legacy Iron Ore Ltd. in Australia which is exploring gold, nickel and base metals. We have recently commissioned a report to identify strategic minerals that will be critical for the country and will be studying prospects in these areas.

What will be the immediate growth drivers post the pandemic?

Globally, China’s steel production and strong margins helped iron ore prices touch a decade high. This also supported the exponential rise in exports of iron ore, pellets and steel and to the increase in domestic prices. We expect international prices to remain strong. Although there may be some softening of international prices if China does step in to check raw material prices or emissions, as it has suggested it may, and global supply – which was less than expected – improves. In the domestic market, the Government of India’s self-reliance initiative will drive industrial growth.

India’s target of 300 MTPA crude steel capacity by FY31 will also be a factor and NMDC with three operational iron ore mining complexes is committed to meeting the increased demand that will arise in chasing this ambition. As I mentioned earlier, we at NMDC are also exploring opportunities in Odisha and Jharkhand states where much of this additional steel capacity is likely to come up. While the recent reforms announced by the Ministry of Mines are aimed at easing production, we expect a healthy demand for iron ore to continue this year. 

To download the Full List of  Roll of Honour Click Here  

 PSU Ranking Methodology

We follow a ranking methodology for PSUs based on comprehensive financial parameters. We have evaluated data only of listed Maharatnas, Navratnas and Miniratnas, among CPSEs. Again, these companies are divided into manufacturing and non-manufacturing, depending on their areas of operation.

We ranked and awarded companies in three categories – Maharatna/ Navratna/ Miniratna of the year, Most efficient and profitable Maharatna/ Navratna/ Miniratna and Fastest growing Maharatna/ Navratna/ Miniratna.

For the first category of award, the main criteria was the size of the company relative to its peers in the category. 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 for deciding the winner.

For the selection of the most efficient and profitable companies, we evaluated the operational efficiency of the company. Hence, we have considered parameters like asset turnover ratio, inventory turnover ratio, operating profit margin, and net profit margin. These parameters reflect the level of efficiency the companies are delivering and their ability to generate profit after taking into account expenses and taxes. This is evaluated to determine the profit-generating capacity of a business and is a top-level indicator of its potential. Equal weightage has been given to all four parameters to arrive at the final ranking.

For the 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 financial performance, we have also taken into account the return on capital employed and return on equity generated by the company. The compounded annual growth for the 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

We evaluate banks and assign ranks using three categories, namely, growth, efficiency and size. Under the growth category, we have taken into consideration the growth in Net Interest Income and Balance Sheet growth from FY18 to FY20. Similarly, under the efficiency category, we have taken into account various parameters such as profit per employee, business per employee and the return on assets generated by each bank. Finally, for the size category, we have considered total asset size, total income, operating profit and net profit for FY20. For the calculation, a higher weightage (40%) is given to the efficiency and size categories and the remaining weightage was given to the growth category.

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 Financial Data Bank PSU Click Here