Erosion in profitability

Written by Pradip Kumar Dey | Updated: Jan 30 2012, 09:24am hrs
Public sector undertakings return on assets (RoA) marginally declined in 2010-11, reflecting an erosion in their profitability.

An FE study of 42 PSUsexcluding banks and NBFCsshows that the PSUs RoA fell by 48 basis points to 17.86% during 2010-11 from the previous year. Their RoA for 2009-10 stood at 18.34%.

The RoA is a ratio that examines the relationship between the size of net income and total assets. The assets comprise both debt and equity. The ratio gives investors an idea of how much profit a PSU is generating from each rupee of assets.

The higher the RoA is, the better, because the company is generating more money with the given assets. The relationship also gives a good indication of the profitability of the assets of the PSUs.

A comparative study has been made for 42 PSUs for 2008-09, 2009-10 and 2010-11.These PSUs aggregated a gross profit of R1.04 lakh crore in 2008-09, which increased to R1.25 lakh crore in 2009-10 and further to R1.37 lakh crore in 2010-11. The total assets of the PSUs increased from R6.06 lakh crore during 2008-09 to R6.81 lakh crore during 2009-10 and to R7.69 lakh crore during 2010-11.

The study of these PSUs reveals that the ratio of gross profits to total assets (which is used to measure the return on assets ) increased from 17.24% in 2008-09 to 18.34% in 2009-10, but decreased thereafter to 17.86% in 2010-11, indicating lower ROA during 2010-11 from the level of 2009-10, but higher from the level of 2008-09.

A steady decrease in the ratio was seen in the case of BEML, where it steadily decreased from 16.70% during 2008-09 to 7.46% during 2010-11. Similarly, in SAIL, the decrease was from 29.93% to 15.17%. Oil India had an RoA of 37.86% in 2008-09, which steadily decreased to 26.74% during 2010-11.

Among the 42 PSUs, five PSUs, namely, BPCL, Neyveli Lignite, RCF, BHEL and Hind Copper, showed a significant increase in RoA during the study period. Of these, the case of Hindusthan Copper is particularly striking. The companys RoA increased from 2.42% during 2008-09 to 20.82% and then 28.83% by the last financial year.

This can be explained from its profit performance. Its gross profit increased by 661.9% to R233.73 crore during 2009-10 and further by 52.8% to R357.17 crore during 2010-11. The asset of the company increased by 11.8% to R1,122.63 crore during 2009-10 and by 10.4% to R1,238.97 crore during 2010-11.

In 2010-11, the top five PSUs according to total assets were ONGC, NTPC, IOCL, Power Grid Corpn.and SAIL. The RoA of these PSUs varies between 25.74% and 9.65%.

In the last three years, the 42 PSUs assets which include fixed assets plus capital work-in-progress, cash and bank balances, loans and other debtor balances, investments and other intangible assets, excluding accumulated lossesgrew at a marginally higher rate.

The asset growth of these PSUs marginally increased

from 12.4% during 2009-10 to 12.9% during 2010-11. For example, BHEL assets growth increased from 22.6% during 2009-10 to 26.6% during 2010-11 and SCIs assets growth also increased from 4.1% to 31.5% during the period.