Bad year for public sector as banks bleed

Combined profit of 66 large listed PSUs slides 44% in FY16

Listed public sector firms, which represent the better part of the larger universe of state-owned firms, had a bad year with their combined profits plunging by 44 per cent on shrinking sales. The trouble was most pronounced in the banking sector but was not limited to it, as a couple of industrial sector firms also slipped into red.

The numbers reiterate the challenge faced by Prime Minister Narendra Modi as he tries to balance the contradictory expectations of two of his key constituencies: reform-focused investors and nationalist hardliners. In an interview to The Wall Street Journal ahead of the second anniversary of his government last month, Modi said, "In any developing country in the world, both the public and private sector have a very important role to play. You can't suddenly get rid of the public sector, nor should you."

An analysis of 66 listed public sector firms, which recorded revenues of Rs 50 crore or more compiled by Business Standard Research Bureau showed that their combined profit fell by 44 per cent to Rs 75,517 crore in FY16, from Rs 1.34 lakh crore the previous year. Net sales (total income for banks) fell by 9.2 per cent, to Rs 20.59 lakh crore. The number of profit-making firms fell from 57 to 43, despite a couple of turnaround stories. The data included 30 companies in the industrial sector, 21 banks and 15 non-bank services sector firms.

Banks were the worst performers, with 13 of them reporting losses. Seven out of the other eight which reported profits saw their profits fall, underlining the extent of the bad debts plaguing the industry.

Services sector was the saving grace, with 12 of the 15 companies reporting profits. Among the loss-making firms in the sector, Mahanagar Telephone Nigam reduced losses by 30 per cent over the previous year.

Gains by oil marketing companies, which benefited from soft crude oil prices that remained below $50 most of the year, meant this sector saw a 50 per cent increase in combined profits.

Hindustan Petroleum Corporation was the top performer, with profits nearly trebling to Rs 4,921.5 crore, from Rs 1,498 crore in the previous year. Indian Oil Corporation and Bharat Petroleum Corporation also reported significant jump in profit after tax (PAT) numbers at 128 per cent and 66 per cent, respectively.

Industrial sector - which included mining, manufacturing and utility firms - also had it bad, with Bharat Heavy Electricals (BHEL) and Steel Authority of India (SAIL) slipping into red. BHEL reported a net loss of Rs 895 crore, against a PAT of Rs 1,452.38 in FY15. SAIL reported a loss of Rs 4,001 crore, as steel prices continue to be under pressure.

Though 23 of 30 firms in the sector were in the green, many reported lower profits, dragging the overall profit number by 23 per cent, on a sales fall of 8.1 per cent. Bharat Immunology is another company that slipped into red in FY16.

Bengaluru-based Indian Telephone Industries was the only government firm that went the other way. The telephone maker reported a profit of Rs 251.19 crore, but this was largely due to an extraordinary item of a government grant to meet employee-benefit expenses.

The lacklustre financial performance has put off investors. Since the highs of 7,800 levels in August, the BSE public sector undertaking (PSU) index has lost nearly a fifth of its value. Though it has recovered from lows of February, it closed at 6,298 on Friday, down 19.55 per cent from August. In comparison, the benchmark Sensex has lost about five per cent in the same period.

Analysts said the pain for the PSUs is likely to continue in the near term. Rahul Shah, vice-president-equity advisory services, Motilal Oswal Securities, said, "Next one year will be challenging for the PSU stocks." Shah said the government is working on cleaning up the banks, which is likely to take a few months. The companies linked to commodities such as Coal India and ONGC, which are index heavyweights and contribute to investor sentiment, are also likely to remain under pressure, given the downturn in the global commodities cycle. Even the prospects of BHEL looks challenging, with no big orders in the picture, Shah added.

That would complicate the government's journey on the long road to achieve the disinvestment target of Rs 56,500 crore. It aims to raise Rs 36,000 crore from selling minority stakes. So far, a single share sale in National Hydroelectric Power Corporation has raised around Rs 2,700 crore.

The government's troubles are not limited to the listed space alone. A report by the Comptroller and Auditor General (CAG) last month had highlighted the problem with the larger PSU universe, which includes many unlisted firms. The CAG audited 157 central public sector enterprises, which have accumulated losses of Rs 1,10,285 crore, while 113 incurred losses during 2014-15, amounting to Rs 15,397 crore. "The net worth of 64 government companies (out of 157) had been completely eroded by accumulated loss and their net worth was negative," said the report.