Poor FY15, but some PSUs to up spend

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Mumbai | Published: July 20, 2015 12:29:40 AM

PSUs had a difficult time in FY15 with net earnings of 50 state-owned firms (excluding banks, oil marketing companies and MTNL) coming off by more...

PSUs had a difficult time in FY15 with net earnings of 50 state-owned firms (excluding banks, oil marketing companies and MTNL) coming off by more than 14% to R74,853 crore, reports Devangi Gandhi in Mumbai. What’s worrying is that the fall came on the back of declines in the previous two financial years of 6% and 1.4%, respectively.

Pertinently, the drop in earnings comes despite savings in costs and is the result of weak toplines; for the sample, net sales fell by 3% following the slide in the toplines for heavyweights such as ONGC, BHEL, SAIL and MOIL. These companies fared poorly for one reason or another — the crash in crude oil prices, weak orderbooks or poor realisations. However, thanks to a strong performance by some players, operating cash flows and free cash flows of listed PSUs rose to a historical high of $34 billion and $9 billion, respectively, last year, Deutsche Bank estimates.

The brokerage believes this could drive fresh capex of $60 billion of large projects over FY16-18. While much of this is driven by improved cash flows of oil marketing companies, other PSUs too are generating a fair amount of cash. Management commentary at PSUs suggests some firms—ONGC, Coal India and GAIL to name a few—are looking to increase spends in FY16. The SAIL management has, however, indicated it may spend as much as 20% less this year; other PSUs that say spends will be flat include Power Grid and NTPC.

Given that commodity prices remain soft and inflation benign companies are likely to be able to continue to save on their raw material bills. Last year, most companies were able to  rein in costs — BPCL, BHEL, ONGC and NTPC reduced employee costs by anywhere between 4% and 25%–but that wasn’t good enough to boost the bottom line. At BHEL the lower employee costs in Q4FY15 were the result of a combination of natural attrition and hiring at junior levels at lower salaries.

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To be sure the results for the sample were skewed by a 31% or Rs 8173 crore y-o-y decline in the net profit of ONGC as the oil producer grappled with a 43% plunge in global crude oil prices. While the subsidy burden hurt profts in Q3Fy15, higher statutory levies and dry-well related write-offs brought down its earnings in Q4FY15.

Reflecting the stress in the power sector with a flat y-o-y growth in its order book to Rs 1.01 lakh crore, revenues and net profits of BHEL declined for a second consecutive year in FY15. Although the heavy equipment maker maintained market share of 72% in Q4FY15, it reported a 38% decline in order inflows to Rs 10,200 crore.

A decline in coal as well as gas-based generation impacted the performance of NTPC. Also, despite reporting a 7% jump in production in FY15 Coal India Limited reported lower profits compared to previous year due to a dip in other income. Analysts have upgraded their production estimates for the coal miner as they see CIL reporting an increase in volumes of 8-10% in FY16-17. In a weak demand environment and amidst a surge in imports, Steel Authority of India (SAIL)  reported  a 20% yoy decline in net profits to Rs 2117.51 crore as per tonne realisations weakened.

PSUs like ONGC are tipped to do better this year since subsidies will be significantly smaller especially if crude oil prices remain below $60 per barrel.  However steel companies may continue to suffer unless the governments raises import duties further or if iron ore prices fall sharply in the home market. With the capex cycle yet to turn, BHEL’s performance may be only mediocre.

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