Jewels In Govt Crown: Life After Liberation

A report card on the problems and prospects of the 'navaratnas' after being liberated from a host of government controls prepared by the Business Standard Research Bureau. The assessment is based on extracts from recent research reports prepared by UTI Securities Research.

Navaratnas have done well during the financial year ended March 1997 compared to the rest of the corporate sector. Sales growth during 1996-97 was a robust 19.5 per cent. While sales of three oil companies and National Thermal Power Corporation increased by over 20 per cent, Indian Petrochemicals Corporation Ltd (-10.2 per cent) and Steel Authority of India Ltd (-2.6 per cent) showed a decline in sales turnover. Like every corporate, interest burden of 25.6 per cent ate into the profit margins of the PSU Navaratnas. As against the negative growth in net profit of the corporate sector in 1996-97, Navaratnas have shown a rise of 3.1 per cent in net profit. But for a 60 per cent decline in net profit of Steel Authority of India Ltd, the net profit of Navaratnas would have been much higher.

 

Bharat Heavy Electricals Ltd

BHEL is the largest supplier of power plant equipment (PPE). Three decades of operation and world class manufacturing facilities have yielded a dominant position in the domestic market for BHEL. It will be very difficult for international companies to compete on level terms with BHEL in India. The company has acquired more than 60 technologies so far from diverse international companies. All of them have been modified and refined for Indian conditions. This technology base cannot be matched by any of its domestic competitors, including subsidiaries of international PPE majors. The company has crafted a strong industrial equipment business over the past decade, utilising its inherent strengths. This accounted for 51 per cent of the company's revenue in fiscal 1995-96. The presence of strong second line business implies that growth will not slacken when power division falters at any point of time.

Concerns: The poor financial condition of the state electricity board has translated into a very high level of debtors in its power business. This is a problem for the company. After 1991, it has directly competed in the domestic market with many of its technology sources. This may impede its success to newly developed technologies.

Prospects: The strong revival of power sector business and continuing buoyancy in the industrial sector business is expected to result in a 19 per cent growth rate per annum between fiscal 1998-2000. Operating margins are expected to be around 14 per cent. The corporate tax cut will help the company handsomely. Net profit for fiscal 1998, which is estimated at Rs 5.4 billion, may rise to Rs 6.2 billion due to cut in corporate tax.

Indian Petrochemicals Corporation Ltd

IPCL has developed a diversified product profile. It has got dominant presence in polymer business and bulk of its revenue in the coming years would come from these products. The polymer business would see better demand supply scenario in the coming years as compared to its fibre business. A low capacity cost gives IPCL the benefit of capital cost advantage.

Concerns: Dependence on gas as a feedstock. The continuous reduction of import duty on polymers has kept domestic price under pressure. A host of petrochemical products would see weak international prices in the coming years.

Prospects: The company has shown flexibility to absorb the drop in the imported polymer price in the wake of downturn international prices and the reduction in major import duty of major petrochemical products. The volume growth in HDPE/LLDPE and PVC is expected to grow by 17 per cent to 20 per cent between fiscal 1997 and fiscal 2000. Sales turnover for 1997-98 is estimated at Rs 36,424 million. Net profits estimates for this fiscal put at Rs 6,406 crore.

Oil & Natural Gas Corporation Ltd

Under the new exploration policy, the company will be reimbursed for its crude output from new wells at international prices. This will enhance the company's profit potential.

Concerns: It has not discovered any major oil sources in the past decade. It has not exhibited a mature technical knowledge in extracting output from Bombay High.

Prospects: In the next two years, since no fresh wells are coming into production, the volume growth will be minimum. In the absence of volume growth, profit growth is predicated primarily on price growth. With gradual dismantling of the administered price mechanism (APM), there is a bright prospect of crude realisation going up in the near future.

Videsh Sanchar Nigam Ltd

VSNL is a monopoly provider of international telephone services in India. This makes it a direct player on international call demand, which is set to expand at a CAGR of 24 per cent on the back of India's growing economy and a continued thrust on globalisation of industry. A new revenue sharing arrangement with DoT will shield its earnings from imminent settlement rate cuts with international carriers. Traffic handling capacity will be doubled by the end of decade. The company plans to enter into new service areas which will provide it with enough capabilities to be a dominant player in a post-deregulated market scenario.

Concerns: The major problem is with regard to settlement rate cuts with international carriers, especially the US carriers. The analyst believe that DoT will bear most of the falling margins as the new revenue agreement suggests. Another concern is of its position when international telecommunication services are opened up to the private sector.

Prospects: The company will be a monopoly provider at least for the next eight years. It will, thus, reap the entire benefits of a fast expanding international telecommunication market. Total operating revenue for fiscal 1998 is estimated at Rs 63,656 million. Similarly, net profit for the year is estimated at Rs 10,220 million. The earning per share is projected at Rs 70.58 in 1997-98, Rs 84.81 in 1998-99 and Rs 94.86 in 1999-2000.

Steel Authority of India Ltd

The company is the largest steel maker in India with a crude steel capacity of 12.2 million tonnes. The 11th largest producer of crude steel in the world has cost advantages due to captive mines and low labour cost. The company commands 40 per cent of the domestic market share. High value added flat products constitute around 60 per cent of its total saleable steel output. The current modernisation programme and expansion plan will help the company to reduce costs and improve margins.

Concern: The domestic steel industry is competitive with the entry of private sector players. Dumping of cheap steel is another concern. The rising cost of cocking coal, huge manpower would adversely affect the working result.

Prospects: A moderate recovery in the steel sector and firming of HRC prices in the international market would help the company to improve its performance in fiscal 1998. The improved liquidity position in the economy, lowering of interest rates and the budget concession would helped the company to improve its net profit by about 30 per cent this year.

Bharat Petroleum Corporation Ltd

Strong distribution network. Highest percentage of retail sales among competitors. Lowest percentage of third party owned outlets.

Concerns: Only one refinery. No pipelines. Increased supply of paper.

Prospects: The profit after tax projected to go by 19 per cent in fiscal 1997-98. There is substantial capex taking place in fiscal 1998. Though funds will flow out in fiscal 1998 and fiscal 1999, no benefits will be immediately available. Due to this, ROCE is expected to drop in the near future. The pressure of financing the increase in pool deficit is reflected in the sharply rising net current asset figure. Price rise, which is expected in fiscal 1998, should bring some benefits.

Indian Oil Corporation Ltd

Six refineries spread across the country. A strong hold in the deficit north zone. One more refinery coming up in north. Owns pipelines, making distribution cheaper.

Concerns: Significant supply of paper expected in future. Compared to other corporates, a higher proportion of outlets are owned by third parties.

Prospects: The company's debt equity ratio is healthy but not as robust as other oil companies. IOC is an illiquid scrip and, hence, price movement is not necessarily a good indicator of its health. Sales turnover in fiscal 1998 is expected to grow by 19 per cent. From 13 per cent growth in net profit in fiscal 1997, net profit growth is estimated at 20 per cent in fiscal 1998.

Hindustan Petroleum Corporation Ltd

Strong upside on deregulation of LOBS. Strong distribution network. Strategically located sources of product.

Concerns: High proportion of non company-owned retail outlets.

Prospects: The company expects to show a robust growth in net profit in coming years. From a net profit growth of 19 per cent in fiscal 1997, the profit growth is projected at 21 per cent in fiscal 1998. A drop in sales turnover to asset ratio is expected as assets are in the process of being built up and they will start generating revenue only in later years.

National Thermal Power Corporation Ltd

The company generated 97.60 billion units of electricity, resulting in an increase of 4.8 per cent over the previous year. NTPC contributes 24.7 per cent of total generation in the country with an installed capacity of 196 per cent. Most of its plants are located at coal pitheads, which reduces transport costs.

Concerns: Stations in the eastern region recorded a plant load factor (PLF) of as low as 46.32 per cent. Loss of generation on account of non-availability of fuels may prove to be problem in the future.

Total coal received was 59.03 million tonnes as against a linkage of 60.82 million tonnes during 1996-97.

Prospects: The company has achieved a sales growth of 22 per cent and net profit growth of 21.7 per cent in fiscal 1997. Sales growth is projected marginally down at 18 per cent, with net profit growth lower at 14 per cent in fiscal 1998.