PSU performance hits new low in ’05-06

Two news items which appeared in national dailies last Thursday are indicative of the government’s attitude towards the public sector undertakings (PSU). One referred to government’s decision to restart the stalled disinvestment process by offloading 10% stake in Leyveli Lignite Corporation and National Aluminium.

The other is on allowing them more autonomy, including freedom to decide on joint ventures, disinvestment in subsidiaries and fresh float of equity.

On the face of it, the two moves show the government’s determination to carry forward reform of the PSUs. It will reduce stake as per the earlier commitment and will provide better working environment to achieve better results by cutting ministerial advances.

So far so good. But what is of primary concern is that the government’s decision to restart the disinvestment process has come at a time when the financial performance of the PSUs has touched a new low. Take the case of Leyveli Lignite Corporation and National Aluminium which are chosen for disinvestment right now.

Leyveli Lignite has witnessed 42.2% fall in its net profit in 2005-06 from Rs 1,215 crore in 2004-05 to Rs 702.35 crore. This is in contrast to 6.3% rise in net profit in 2004-05 over the previous year.

This had its impact on its stock prices too. The stock price in BSE has fallen by about 15% from Rs 78.05 on January 2, 2006 to Rs 66.35 on June 22. Incidentally, during the last market rally the price of Neyveli Lignite stock reached a record Rs 95.60 on May 9, 2006.

And if National Aluminium has managed to increase its net margins in 2005-06 following a sharp rise in metal prices, the rate of rise was considerably lower than what it achieved in the previous year. Net profit increased by 26.7% last year against 67.5% in 2004-05.

Likewise, although the stock price has increased by about 6% between January 2, 2006 and June 22, 2006, it has witnessed a sharp deceleration in recent months. After reaching a yearly high of 326.05 on May 2 the price has declined to Rs 239.60 on June 22, 2006 — down by 26.5%.

The performance of Leyveli Lignite or National Aluminium was, however, not an exception, The PSUs in general seem to have touched a new low last year. An ET survey of 42 PSUs find that their aggregate net profit has declined by 12.3% in 2005-06 over 2004-05.

The fall in net profit was largely due to their failure to contain expenses. The turnover has increased by 17.8% in 2005-06 but a 24.5% rise in expenditure during the same period has squeezed their margins. This is evident in the sharp fall in profitability ratio. Profitability ratio, measured as net profit as percentage of net sales, has declined from 8.01% in 2004-05 to 5.96% last year.

Admittedly, much of the rise in expenditure owes its origin to rise in crude prices. The aggregate expenditure of seven oil and refinery companies in the list has increased by 27.6% in 2005-06 following 29% rise in their raw materials cost. They accounted for nearly three-fourths of the total expenditure of the sample companies. The aggregate net profit of the oil companies has declined by a massive 32.7% last year.

That the oil companies suffered on margins due to rise in crude prices is history now, but how did the others do? Not very different either. May be at a lower rate, but they too have witnessed a fall in net margins.

The aggregate net profit of the sample PSUs, excluding the oil companies has declined by 4.6% last year. But then their turnover growth too would look drastically slender without the oil companies — their aggregate turnover grew by 10.8% in 2005-06 compared to 21.2% of the oil PSUs.

At the individual level 10 of the 35 non-oil PSUs, have witnessed a fall in net profit in 2005-06 over 2004-05. Two others, ITI and Andrew Yule which were already in red have incurred a larger net loss last year compared to 2004-05.