Public sector firms have had a difficult 2015-16 with net profits of 80 companies (PSUs) dropping by more than 40% to Rs 80,711.75 crore from Rs 1,35,808 crore in 2014-15. Worryingly, the plunge comes on the back of declines seen in FY15 when net profits slipped by 15%.
The consequences of smaller net profits and a lower increase in operating profits of just under 6% are that internal accruals will be squeezed necessitating borrowings to meet capex targets.
At SAIL, for instance, operating profits were a negative Rs 2,860 crore compared with a profit of Rs 4,900 crore in 2014-15. Analysts estimate operating cash flows could be a negative Rs 4,700 crore in the current year which means the steelmaker will need to borrow to fund capex.
At NTPC, free cash flows could be crimped; analysts estimate these at close to Rs 9,000 crore compared with Rs 15,500 crore in FY16. The company has planned for a capex of around Rs 26,000 crore, more or less similar to last year’s spends. Net profits for the power producer in the current year are expected to come in at a flat Rs 9,500 crore.
The reason it’s important that PSUs invest in new projects is because government allocation for capex, in the current fiscal,is up just 4% at Rs 2.47 lakh crore compared with a rise of 21% in FY16. Much of the expenditure will be made in the railways and road sectors.
With the economy not gaining too much momentum, cash flows remain under pressure. At GAIL, operating profits fell 9% to Rs 4,268 crore while at ONGC, free cash flows are estimated to turn negative this year. The oil explorer has planned for a capex of close to Rs 30,000 crore this year; the management said it had invested Rs 36,000 crore last year. BHEL’s operating cash flows were just Rs 675 crore last year.
Some blue chip PSUs, however, are tipped to increase their budgets; IOCL, for instance, has indicated its capex for the current year will be close to Rs 17,000 crore compared to Rs 14,500 crore last year.
In the last two years, industry gained from a fall in commodity prices and companies were able to rein in raw material costs.
In addition, several PSUs brought down employee costs anywhere between 4-25%. However, analysts point out these benefits could reverse this year and cost pressures will start to emerge over the next few months.
“The sharp increase in retail auto fuel prices and a rebound in global metal prices along with higher import tariffs on domestic steel will show in general inflation,”analysts at Kotak Institutional Equities observed.
Several public sector companies were unable to return cash to shareholders while some skipped it altogether. However, dividend paid out by a clutch of 80 PSUs, including banks in FY16 — of Rs 66,960 crore was 43% higher than Rs 46,787 crore paid in FY15.