PSU profits strained in weak economy

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Mumbai | Updated: October 5, 2015 1:31:34 AM

If corporate India is struggling to make ends meet in a sluggish economic environment, state-owned enterprises are among the worst hit.

Given the subdued profit outlook for the PSU pack, their stocks too are likely to under-perform the benchmark indices until there are signs of a rebound in their fortunes; the BSE PSU index has lost close to 19% in 2015 so far, more than four times the drop in the 30-share Sensex. (Courtesy: india.gov.in)Given the subdued profit outlook for the PSU pack, their stocks too are likely to under-perform the benchmark indices until there are signs of a rebound in their fortunes; the BSE PSU index has lost close to 19% in 2015 so far, more than four times the drop in the 30-share Sensex. (Courtesy: india.gov.in)

If corporate India is struggling to make ends meet in a sluggish economic environment, state-owned enterprises are among the worst hit. In 2014-15, all seven Maharatna PSUs saw a decline in profitability but the bad news is that the poor run could continue for this clutch of firms which includes commodity players, utilities and engineering firms.

While prices of most commodities are expected to stay relatively stable from here on, domestic demand is taking its own time to revive. Which is why analysts expect profits for these PSUs to worsen this year. Consensus estimates, compiled by Bloomberg, predict five of the seven will report a sharp fall in profitability of anywhere between 30% and 80%.

psu

That means shareholders — including the government which is the largest of them all — might not benefit from generous dividends typically doled out by these companies. In FY15 too, dividends paid out by by the likes of a Coal India, NTPC, GAIL and SAIL were smaller than that in the previous year.

Given the subdued profit outlook for the PSU pack, their stocks too are likely to under-perform the benchmark indices until there are signs of a rebound in their fortunes; the BSE PSU index has lost close to 19% in 2015 so far, more than four times the drop in the 30-share Sensex.

BHEL, for instance, has lost about a fourth of its value since it declared its financial performance for Q1FY16.

The engineering company’s order book is growing at a tardy pace for close to two years now but inflows in the three months to June, were better than expected convincing analysts the company should report better profits this year. The final numbers will of course depend on how well the company executes orders which is why profit growth estimates range between 6% and 70%.

A fifth of BHEL’s current order book of R1.16 lakh crore comprises slow-moving projects and besides, most projects it hopes to win would be from PSUs and state electricity boards (SEB), which depend on government spending. Recently, CRISIL downgraded the rating outlook for long-term bank facilities of BHEL to “negative’”, adding a further downgrade was possible if project execution continued to be slow, such that there is no meaningful improvement in profitability or if a deterioration in the receivables or sizeable debtor write-offs impacted the financial metrics.

The deteriorating finances of SEBs could also weigh on the FY16 earnings growth of NTPC which operates on a regulated model with a fixed return on equity (RoE) and has an assured fuel supply agreement with Coal India. However, offtake of power remains weak — power generation fell by 7% yoy in Q1FY16.

As for SAIL, which reported an operating loss for the first time in 13 years in the three months to June 2016, the steel producer may continue to do badly despite the imposition of a safeguard duty of 20% on hot rolled products. In Q1FY16, the steel producer was hurt by rising imports and saw a sequential increase in inventories. Bloomberg consensus estimates —based on predictions of 14 analysts — show the metals maker may report a fall in net earnings this year of as much as 80%. Ironically, at a time when iron-ore prices are falling, SAIL will be compelled to use its in-house ore which may turn out to be costlier. Jefferies expects SAIL to report a steel drop of more than 30% in EBITDA per tonne this year.

With the steel industry facing strong headwinds, profit margins of NMDC too may remain under pressure; analysts say the state owned mining giant’s EBITDA could fall as much as 50% in FY16. The combination of a sharp decline in net realisations —resulting from its dependence on the domestic market — and surplus inventory could bring down the topline. NMDC has been compelled to take price cuts in the last several months dropping prices of iron ore lumps and fines by 32 % and 45%, respectively, since January.

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