Friday, August 03, 2012

India’s economic objectives with their private counterparts

Indian psus have followed an optimistic trajectory post-liberalisation and have seen some vital successes through well-timed and executed strategic realignment. Virat Bahri of B&E brings out the lessons from these successes and also on how these psus can keep the growth story intact going forward and fulfil india’s economic objectives with their private counterparts

Post-liberalisation, turnaround has also been a recurring theme for quite a few PSEs, which have been stung by the competition and responded with dramatic turnarounds that only look believable in retrospective terms. SAIL itself is a fascinating example, as it was facing a net loss of Rs.15.74 billion in FY 1998-99. A comprehensive rationalisation of production processes was done, the product mix was strongly realigned and production of saleable steel products was ramped up. Within 6 years, the company had posted an impressive profit of Rs.68.17 billion. BHEL had a net sales of Rs.68.962 billion in 1998-99 and a net profit of Rs.5.99 billion. Once the central government passed the Electricity Act for rapid transformation of the power sector, the company was faced with a tremendous surge in demand and was found wanting in terms of manpower and capacity. Besides, Chinese competition has come in droves, buoyed by the Chinese government’s strategy of having an undervalued yuan. BHEL aggressively enhanced capacity and scope of business. Though problems persist, BHEL posted a revenue of Rs.424.95 billion (CAGR of 16.36% since FY 1998-99) and a net profit of Rs.60.11 billion (CAGR of 21.18% since FY 1998-99) in FY 2010-11. ONGC was often criticized for its inefficient practices and relatively staid approach. It is well known how the company transformed under the aegis of erstwhile Chairman Subir Raha and hasn’t looked back since. When he joined, the company was facing depleting production and reserves. He led the company on an expansion spree and also promoted better utilisation of existing assets. Oil & Oil equivalent gas production of ONGC was 62.07 MMtoe in FY 2010-11. Its net profit of Rs.189.24 billion placed it on top of the B&E Power 100 List for the year. State Bank of India (SBI) was similarly losing market share rapidly to private and foreign banks. The challenge was to shake up an institution with 2,00,000 employees from its stupor. Under ex-Chairman O. P. Bhatt (who joined in 2006), SBI took a unique initiative of stopping the VRS scheme so that they would not lose valuable talent to private enterprises. In addition, they ramped up process efficiency by manifolds and Bhatt made the effort to align the organization towards a common vision and a common set of objectives, primary being their drive to gain favour with mid to large enterprise accounts and with the growingly young workforce in India. The State Bank group’s advances stood at Rs.9.94 trillion for FY 2010-11 (growth of 15.87% yoy) while deposits stood at Rs.12.45 trillion (growth of 12.43% yoy).

It’s now common knowledge that Chinese state-owned enterprises are so well integrated with the central government that they are able to serve long term national strategic objectives with amazing efficiency. In addition, they go global with a clinical aggression that surprises even the leading private companies in the Western world. As with other aspects of the Indian economy, our PSUs are a few steps behind China, but there are notable examples where they are making their contributions count. ONGC itself has been competing head to head with global oil majors to acquire E&P assets. This year, it signed a deal with KazMunaiGas in Kazhakastan for acquiring 25% interest in the Satpayev exploration block. SAIL, which has an order book of Rs.540 billion in its drive for 23.5 million tonnes hot metal capacity by FY 2012-13, has also developed a structured R&D set up and plans to take R&D spends to over 1% of total turnover. Along with NTPC, NMDC, Coal India & RINL, SAIL set up a consortium named International Coal Ventures Ltd. (initial authorised capital of $2 billion) a few years back to pursue metallurgical coal and thermal coal assets across the globe. On the flip side, though, no successful bid has happened yet, in large part due to mines getting expensive, and the initiative needs a push. Also, it has got into tie ups with global giants like POSCO and Kobe Steel for strategic collaboration over projects, technologies, et al. ONGC now runs 31 projects across 14 countries and also made the big ticket acquisition of Imperial Energy. NTPC is planning to become a 75,000 MW company by 2017 compared to current capacity of 34,854 MW and is setting up a power plant in Sri Lanka. By 2032, it is also planning to have 28% of its power production coming from carbon free energy sources. GAIL is targetting a turnover of Rs.1 trillion by FY 2016-17 from Rs.324 billion currently. Part of the plan is to aggressively pursue global investment opportunities throug investment arms and JVs. Another interesting case is Rural Electrification Corporation of India, which finances rural power projects after proper due diligence. The company has been proactive on tapping international markets for funding and in FY 2010-11, it mobilised $1.17 billion from overseas instruments. Indeed, there are struggling firms and Air India is the most vivid example of the worst that can happen with PSUs. They are telling reminders of the road that’s not to be taken.


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