PSUs outsmart many big firms on returns

Generate return on equity of 10.5%, compared to 8.7% for the top 10 family-owned groups

It seems the Government of India may not be a bad investor as a promoter of businesses. It earns higher returns on its investment in public sector undertakings (PSUs) than several of the country's top business families earn on their investment in group companies. At 10.5 per cent return on equity (RoE) during financial year 2015-16 (FY16), PSUs as a group did better than some of the country's large business groups such as AV Birla, Vedanta, Bharti, JSW, Anil Ambani and OP Jindal.

Overall, government-owned companies were ranked fifth on RoE basis in FY16 among the country's top 11 business groups (including PSUs). The groups ahead of PSUs include Tata, Mahindra, Mukesh Ambani and Adani.

In the previous financial year, 43 non-financial PSUs in the Business Standard sample reported a combined net profit of around Rs 79,000 crore against their combined net worth of Rs 7.52 lakh crore. In comparison, the top 10 family-owned business groups reported a combined net profit of Rs 82,000 crore against their net worth of Rs 9.45 lakh crore.

The analysis is based on the combined reported net profit and net worth (shareholders' equity) of government-owned companies and those from top family-owned business groups for FY16. The sample excludes banks and non-banking financial companies. The data are on a consolidated basis, adjusted for listed subsidiaries of listed holding companies in the sample. Family-owned business groups are ranked according to the combined assets of the listed group companies at the end of FY16.

RoE is calculated by dividing the company's annual net profit by its net worth and measures profits generated per unit of shareholders' investment. As equity is a liability for the company that needs to be serviced (by way of dividend), a higher RoE is desirable.

The return ratios have been on a downward trajectory across corporate India since the 2008 financial crisis because of a mismatch between demand growth and the ever-growing balance sheet of corporates. Companies and groups with exposure to capital-intensive sectors such as metals and mining, telecom, power, infrastructure and capital goods have been the worst hit.

While PSUs too have large exposure to these sectors, they seem to have done a better job of navigating the slowdown than the bulk of the private sector. At the end of FY16, PSUs as a group reported better RoE than both the top 10 family-owned business groups (8.7 per cent) and top 20 family businesses (8.3 per cent).

Experts attribute this to the general conservatism of government-owned companies, against the aggressive growth push by the private sector.

"PSUs are slow by nature and hardly ever go for big-bang growth push. Besides, most PSUs are industry-focused and their growth trajectory is closely linked to the industry cycles unlike private sector companies that go for diversification or mergers and acquisitions if their organic growth slows down," says G Chokkalingam, founder & chief executive officer, Equinomics Research & Advisory.

There is some truth in this. In the past five years, the combined assets of non-financial PSUs in the BSE 500 index grew at a compound annual growth rate (CAGR) of 8.7 per cent, slower than the 12 per cent CAGR in assets reported by non-financial private sector firms during the period.

This translated to lower revenue growth for government-owned companies. In the past five years, PSUs' combined net sales grew at a CAGR of 2.4 per cent. In comparison, non-financial private sector firms' combined net sales grew at a CAGR of 10.8 per cent.

Faster growth in the private sector, however, came at the cost of higher indebtedness. At the end of FY16, non-financial private sector companies had gross debt to equity ratio of one. The corresponding ratio was 0.66 for PSUs. In contrast, most of the diversified family-owned business groups are battling high indebtedness with group level leverage ratio of more than one at the end of FY16. As a thumb rule, analysts and rating agencies consider a leverage ratio of less than one to be optimal. The gross debt to equity ratio of most of the financially stretched companies is much higher than one.