PSUs fare well as MNCs, pvt cos feel heat

MUMBAI: Public sector undertakings (PSUs), generally perceived to be old-fashioned and unglamorous, rarely make headlines for outstanding performance in a booming economy. But when the going gets tough, one is able to appreciate the virtues of these fuddy-duddies. As the economy slows down, PSUs appear to be on a firmer wicket compared with their much-hyped counterparts in the private sector.

As private sector players battle rising debt and diminishing cash flows, the PSUs are sitting pretty with low levels of leverage and a growing pile of cash. PSUs��� cash flows and debt-servicing capabilities are now comparable with, or better than, the MNCs listed in India.

This means that the PSUs are least likely to cut back on dividend payments next year, unlike private companies which may be forced to cut back dividends, since they scramble to fund their capex and other growth plans. For investors worried about the financial health of India Inc, PSUs appear a safe haven, for now.

In FY08, for instance, the actual cash flow of 28 top PSUs (non-oil and non-banking & finance) was 107% of their reported cash profit. The corresponding figure for MNCs and private sector companies was 76% and 67%, respectively. And FY08 was no exception. The PSU pack has outsmarted the other two peers in the past three years.

In FY08, the top 28 PSUs (non-oil and non-banking) generated free-cash flow of over Rs 23,000 crore. In contrast, private sector companies reported a cash outflow of whopping Rs 1.37 lakh crore, only part-financed from internal cash generation. In each of the past three years, private sector companies have reported a negative free-cash flow, ie, their cash expenses have overshot their internal cash generation. In the case of PSUs and MNCs, the internal cash generation has been sufficient enough to meet their cash burn rate.

The negative cash flow of private sector companies has been mainly due to the ambitious capex programmes launched by leading companies across sectors. In the past three years, the annual cash outflow (due to expansion plans) of private sector companies in our sample (non-oil and non-banking & finance companies) has jumped by five times to Rs 2.3 lakh crore in FY08. In comparison, the internal cash generation during the period hardly doubled to Rs 92,000 crore.

The shortfall was met by raising funds from debt or equity. During the period under review, the total debt of 322 private sector companies in our BSE 500 sample jumped two-and-a-half times to nearly Rs 3.5 lakh crore, while their net worth jumped three times to around Rs 5.3 lakh crore at the end of the period. Companies, whose data for four years were not available on a standalone basis, were excluded from the exercise.

The same difference applies, when it comes to individual companies. For example, in the case of the capital goods sector, Bhel has better cash flows than Larsen & Toubro (L&T). Similarly, SAIL has a lower debt level and healthy cash flows compared to Tata Steel, which has taken a huge debt in recent times to fund its acquisition and domestic expansion programme. On an average, PSUs have been less ambitious about capex and unlike their private sector peers, they largely depend on internal accruals to fund their growth plans.