PSUs sitting on a cash pile of Rs 1,00,000 crore

If cash is king in times of credit crunch, then government-owned companies (PSUs) are emperors. India���s top 30 non-financial PSUs were sitting on a cash pile of nearly Rs 1,00,000 crore at the end of FY08, a 100% growth over FY06. What is interesting is that PSUs were able to accumulate this cash despite the poor profitability of oil majors, which account for a bulk of PSUs��� revenues.

The cash held by the 30 companies adds up to nearly two-thirds of their combined debt, making them resilient to a major economic downturn. The ratio was around 47% three years ago. Leading PSUs such as Bharat Heavy Electricals (BHEL), Steel Authority (SAIL), ONGC, GAIL, Bharat Electronics (BEL), Container Corporation and National Aluminium (Nalco) have either become debt-free or have a low debt:equity ratio. BHEL has became debt-free. SAIL's debt:equity ratio declined to a historic low of 0.13 at the end of FY08 compared to 0.6 four years ago. MRPL���s debt:equity ratio came down to 0.54 in FY08 from 1.6 in FY05. A decline in the debt servicing costs lowers the fixed costs and makes PSUs less vulnerable to a slowdown in earnings growth.

The government-owned companies have learnt their lessons from the economic downturn in the 1990s and early 2000s, when many of them were tottering on the verge of bankruptcy thanks to high leverage ratios. The most glaring example is SAIL. The steel major's debt:equity ratio shot up to over 5 at the end of FY03, with the company reporting losses in the five preceding years.

The PSUs have used their strong earnings growth and cash flows in the past few years to drastically reduce their debt. Such measures have put PSUs in an advantageous position compared to their private sector counterparts which are facing difficulties in raising funds from the capital market to fund their expansion projects.



The stock market is however still to fully appreciate the fact. In the steel space, SAIL has fallen as much as Tata Steel, although the Tata group company has a significantly higher debt burden than the PSU major. This has opened up a buying opportunity for retail investors, according to market analysts. If the economic downturn persists or worsens, PSUs are expected to be hit the least, they say.

The only exception is oil marketing companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum, which had to borrow heavily in past three years to make up for the losses incurred due to the high crude prices. With oil prices falling nearly 75% from their peak early this year, the balance sheets of oil marketing companies are also set to improve.