Govt can raise up to 30 bn by leveraging non financial PSUs balance sheet

Move is however likely to trigger a de-rating in PSU stocks, could be a zero sum game for govt

The finance minister can raise around $30 billion dollar (Rs 180,000 crore) by leveraging the balance sheet of non-financial PSUs without hurting their balance sheet. The amount is around a fifth of the the combined market capitalization of top non-financial PSUs in July. The calculation is based on the assumption that these government owned firms leverages their balance sheet by up to 50% of their networth.

“Raising $25-30 billion dollar through PSUs won’t be a problem given the size and financial strength of large government owned firms. The question is why will you do it and what will these PSUs do with the funds so raised,” says Deep Narayan Mukherjee, director Ratings at India Ratings. For him the biggest issue will be transmission of this fund to the PSUs banks that are in desperate need of fresh capital.

At the end of March this year, the top 21 non-financial central PSUs combined networth was Rs 568,011 crore ($95 billion). In comparison, the total debt on their books was around Rs 2.5 lakh crore, mostly by oil marketing companies, power companies (NTPC & Power Grid) and SAIL. Nine out of 21 PSUs in sample are debt free and sitting on surplus cash & equivalent seating cash & equivalent worth Rs 1.18 lakh crore ($20 billion at current exchange rate). Nearly half of this amount is accounted for by Coal India. Others members of this club includes NMDC, ONGC, Bharat Electronics, Bharat Heavy Electricals, Container Corporation and Engineers India among others. Seven other PSUs including Gail, NTPC, SAIL, Indraprastha Gas and Petronet LNG have moderate debts on their books with debt to equity ratio of less than 0.5.

Experts say that these debt free PSUs would be the first vehicle for the finance minister to raise dollar denominated debt. The lowest hanging fruit in this strategy would be debt free companies like Coal India, NMDC and ONGC among others. Our sample is restricted to PSUs that are part of the BSE-200.

Analysts, however, fear that any news of fund raising by these companies is likely to trigger a sell-off in these stocks jeopardizing the divestment programmes. PSUs stocks have already been one the biggest laggards on the bourses in last one regardless of their business performance or balance sheet strength.

“So what government could gain by a PSU bond would be more than negated by fall in their market value. Besides interest on the debt would eat into their profits and thus reduce government dividend income by equivalent amount,” says Dhananjay Sinha, co-head Emkay Global Financial Services.

Other likely candidates for dollar debt issuances would be moderately indebted PSUs such as GAIL, Steel Authority of India, NTPC, NHPC and Indraprastha Gas among others. Most of these companies are in capex phase and government has to balance its fund raising plans with the fund requirement pf these companies.

Experts also say that PSUs enjoy an implicit sovereign guarantee and foreign investors may treat PSUs at par with government.

“For bond holders there is practically no difference between PSU balance sheet and that of the government. For them it would just be a change of nomenclature and all liabilities would be treated as public,” says Deep of India Ratings.

Besides, the additional $30 billion would add little over 10% to our forex reserves and would thus hardly make a difference to India macro-economic ratios.

For market experts, a better option would have to improve the operating environment of the PSUs so that they become more attractive to foreign equity investors.

“Given their size and potential profit opportunity in India, attracting sizeable FII inflow won’t be a problem for PSUs. But only if they are allowed to operate freely,” says Dhananjay.

Oil marketing companies are the most glaring example of government interference killing investors appetite for PSUs stocks.