The great public sector myth

Written by Ahindra Chakrabarti | Updated: Jun 26 2009, 07:28am hrs
Public sector companies have started reporting their financial performance in recent months. Some of them are reporting excellent growth in profits. Hindustan Aeronautics Limited (HAL) has reported 18.96 % income growth of Rs 10,260 crore and 4.4% profit (before tax) growth of Rs 2,260 crore. While these numbers appears impressive, a closer analysis shows they dont reflect real performance. For that, one has to dig deeper into the financial statements, which reveal that profits earned from companies operations dont show competency. Specifically, this story is revealed through profit and loss accounts, which in India present income from all sources clubbed together: income from sales, operation and other sources. To understand operations contribution to profit before tax, one needs to deduct other incomes, to arrive at the income from sales and operations. HALs financial figures also show that profit before tax is more influenced by non-operating income, such as that from interest. See table1.

A look at this table shows that HALs profits from operations are falling, while share of profits from other income is increasing. From where is the company generating this other income From activities other than selling its main product, aircrafts No. Income is mainly generated by parking funds in the bankwhich earns interest and some amount of provisions is written back. Next, how is this interest income being generated The largest customer of HALs aircrafts and other services is the defence ministry, specifically the Air Force. This customer advances huge sums (Rs 28,60,387.55 lakh as on March 31, 2008) to HAL every year, to carry out production and operations. Since the Air Force is the final buyer, this money gets adjusted against sales. Year after year, the company earns a good amount of interest on this money, and its bottom line gets pushed upwards. In the current scenario, the finance ministry may re-examine the practice of keeping funds idling in companies.

Other sister PSUs are not lagging behind HAL. On examining some financial statements at random, we find a good number of Navaratna companies are also in the fray. They have huge idle cash balances lying in the banks, generating interest, supplementing companies bottom and top lines, and polishing up their images. Table 2 shows how some of these companies are doing excellent jobs while others really need to improve their operations and cash management.

Completed financial statements for 2008-09 are not yet available, but last two years data drive home the role of interest and other incomes in enhancing companies bottom lines. Table 2 shows thatwith the exception of SAILother incomes are contributing heavily to the profits before tax of companies. BHEL, SAIL, ONGC and Neyveli Lignite Corporation (NLC) all have huge cash balances and are earning high interest incomes. Refining companies like IOC, BPCL and HPCL are also enjoying good other incomes because they have huge investment portfolios, where earnings are being generated. In all these three companies, interest income has increased over the previous years.

While being a cash rich company may gain a pat on the back, it also conveys a lack of cash planning, a missing out on opportunities for optimising profits by exploiting legally available investment breaks. Without doubt, this is not a skill that many PSUs can lay claim to today. But this issue has to be addressed through training, which addresses the financial sector with complexity, sophistication and finesse. There is also a need to develop a risk management framework for establishing proper control mechanisms. Besides, PSUs must have corporate plans where surplus resources contribute to the creation of sustainable value. Merely boosting profits by any possiblemeans is not desirable in the PSU context. It is the real sector that should drive the financial sector, not the other way round. PSUs must live up to this motto.

The author is director, Takshila Institute for Global Management, Kolkata