Leveraging PSU balance sheets may prove a zero-sum game for govt

Move could fetch about $30 billion but might also trigger de-rating of PSU stocks

Finance Minister P Chidambaram last week said financially-strong public-sector undertakings (PSUs) could be asked to raise funds abroad. Leveraging the balance sheets of non-financial PSUs by up to 50 per cent of their net worth is estimated to raise about $30 billion (Rs 1,80,000 crore) — close to a fifth of the combined market capitalisation of top non-financial state-run companies in July. However, experts do not seem to be convinced with the idea of such a move.

“Raising $25-30 billion through PSUs won’t be a problem, given the size and financial strength of large ones. But the question is, why will you do that and what will the PSUs do with the funds so raised?” asks India Ratings Director (Ratings) Deep Narayan Mukherjee. He says the biggest issue will be transmission of the fund to PSU banks, which are in need of fresh capital.

At the end of March this year, the combined net worth of the 21 top non-financial central PSUs was Rs 5,68,011 crore ($95 billion). In comparison, the total debt on their books was around Rs 2.5 lakh crore — mostly for oil marketing companies, power companies (NTPC & PowerGrid) and Steel Authority of India Ltd (SAIL). Nine of these 21 in the sample were debt-free and sitting on surplus cash & equivalents of Rs 1.18 lakh crore ($20 billion) — nearly half of it accounted for by Coal India. Other members of this club include NMDC, ONGC, Bharat Electronics, Bharat Heavy Electricals, Container Corporation and Engineers India. Seven other PSUs, including Gail, NTPC, SAIL, Indraprastha Gas and Petronet LNG had moderate debt on their books, with a debt-to-equity ratio of less than 0.5.

Experts say these debt-free PSUs would be the first vehicle for the finance minister to raise dollar-denominated debt. The lowest-hanging fruit in this strategy would be debt-free companies like Coal India, NMDC and ONGC, among others. The sample is restricted to PSUs that are part of the BSE-200 index.

Analysts however fear any news of fund-raising by these companies might trigger a sell-off in these stocks, jeopardising the divestment programme. PSU stocks have already been one of the biggest laggards on the bourses in the past one year, regardless of their business performance or balance sheet strength. “So, what the government gains from PSU bonds will be more than negated by the fall in market value. Besides, interest on the debt will eat into their profits and, thus, reduce the government’s dividend income by an equivalent amount,” says Dhananjay Sinha, co-head, Emkay Global Financial Services.

Other likely candidates for dollar debt issuances would be moderately-indebted PSUs like Gail, SAIL, NTPC, NHPC and Indraprastha Gas, among others. Most of these firms are in a capital-expenditure phase and the government has to balance its fund-raising plans with the fund requirement of these companies.

Experts also say PSUs enjoy an implicit sovereign guarantee and foreign investors might treat PSUs on a par with the government. “For bond holders, there is practically no difference between the balance sheet of a PSU and that of the government. For them, it will just be a change of nomenclature and all liabilities will be treated as public,” says India Ratings’ Mukherjee.

Besides, the additional $30 billion will add a little over 10 per cent to the country’s forex reserves — that might make little difference to macroeconomic ratios.

For market experts, a better option would have been improving the operating environment of PSUs, so that they became more attractive to foreign equity investors.

“Given their size and potential profit opportunity in India, attracting sizeable FII inflow won’t be a problem for PSUs. But, that will be only if they are allowed to operate freely,” says Sinha.