Listed CPSUs suffer value erosion

While the listed CPSUs showed a dismal growth performance during April-December 2012, their net profit contracted just over seven per cent during the period.

Listed Central Public Sector Undertakings (CPSUs) were lagging far behind their peers in the stock exchange when it comes to earnings performance during April-December 2012 period. While the aggregate sales of 30 companies in the benchmark BSE index Sensex rose 12.68 per cent during this nine month period on a year-on-year basis, the corresponding growth for 28 listed CPSUs was a mere 5.8 per cent.

What is more worrisome is the fact that the net profit of these 28 CPSUs contracted 7.35 per cent during April-December 2012 from the year-ago period as against 8.46 per cent expansion of net profit for Sensex companies.

These CPSUs witnessed muted growth in their topline because they are mostly related to key infrastructure sectors like power, mining, metals where a large number of projects are facing inordinate delays. Earnings of some companies suffered because of sector-related and company-specific issues.

For example, the sales of power equipment major BHEL rose a meagre 2.31 per cent to Rs 29,220 crore during April-December 2012 because of declining order book and delay in execution. The order book of the company is contracting because many power projects are facing delay owing to lack of fuel linkages, hurdles in statutory clearances etc. The company’s net profit declined to Rs 3,377 crore during April-December 2012 from Rs 3,660 crore in the year-ago period because of increase in both, employee cost and other expenses, reports suggest.

Sales of India’s largest iron ore producer NMDC contracted to Rs 7,500.02 crore from Rs 8,666.88 in April-December 2011 because the firm suffered loss of production at its Bailadilla mines in Chhattisgarh owing to incessant rain. Bailadilla mines account for over 80 per cent the company’s ore production. But recently, the company’s Chairman and Managing Director CS Verma expressed confidence of reporting better sales and profit during the January-March 2013 quarter on the back of improved production and evacuation performance. During January, the state-owned miner saw the highest ever monthly production of 30 lakh tonne of iron ore, he said.

State-owned metal trading firm MMTC saw its sharpest fall in revenue during April-December 2012 at Rs 21,435.85 crore compared to Rs 55,384.79 crore in the year-ago period because of decline in the export of iron ore. Export of iron ore declined considerably in recent period with the Supreme Court ordering a ban on ore mining, in response to large scale irregularities in states like Karnataka and Goa. According to investment bank Barclays Capital, India’s iron ore exports may nosedive to 17.3 million tonne during 2012-13 from 61.8 million tonne in the previous year.

Sales of Steel Authority of India (SAIL) declined to Rs 32,267.84 crore from Rs 32,649.82 because of moderation in demand for steel in the country. Growth in steel demand was muted at 6.8 per cent in 2011-12 and this is expected to decline further to 5.5 per cent in 2012-13 because of slowdown in the overall economy. Although sale of state-run oil marketing companies (OMCs) rose during April-December 2012, they posted losses during this period because of delay in receiving subsidy compensation from government for selling fuel products at below market rates. During April-December 2012, the loss of Hindustan Petroleum Corporation (HPCL) rose to Rs 6,774.60 crore from Rs 3,719.56 crore in the year-ago period. Similarly, the loss of another state-run refiner Indian Oil Corporation (IOC) rose from Rs 8,715.81 crore to Rs 9,507.64 crore in April-December 2012. However, these OMCs traditionally report profit for the full financial year at the end of March as they receive payment from government for their under-recoveries by that time.

Some companies faced pressure on their margin because of rise in interest costs and other expenses. For example, the interest outgo of start-run refiner Chennai Petroleum Corporation more than doubled to Rs 358 crore from Rs 163 crore between April-December 2011 and April-December 2012. Interest cost of BEML rose sharply to Rs 100.97 crore during April-December 2012 from Rs 61.41 crore in the year-ago period.

But some companies smartly managed to tighten their expenses by reining in their operational cost and interest outgo in order to cope up with the subdued revenue flows. For example, Engineers India reduced its total expenditure to Rs 1,541 crore during April-December 2012 from Rs 1,948 crore in the year-ago period and this enabled the firm to report rise in profit despite decline in sales. Similarly, state-run lender Power Finance Corporation reduced its total expenditure to Rs 98.21 crore in April-December 2012 from Rs 274 crore in the year-ago period on the back of fall in income and profit. The company’s revenue declined to Rs 12,596.75 crore from Rs 9,331.93 crore in April-December 2011.

Value erosion

Investors punished the stocks of these CPSUs because of their poor earnings performance in April-December 2012 and this is evident from the decline in their share prices. Between April 2012 and the beginning of March 2013, the PSU index of Bombay Stock Exchange declined to 6,866.07 from 7,248.96. However, the market bellwether BSE Sensex rose to 18,918.52 from 17,318.81 during this period. Thus, shares of CPSUs did not participate in the rally of the BSE Sensex because of their poor financial performance. This is also reflected in the movement of price/earnings (PE) ratio of BSE Sensex companies and that of listed CPSUs. While the PE ratio of BSE Sensex firms remained steady around 17 between April 2012 and March 2013 that of listed CPSUs declined to 11.17 in the beginning of March 2013 from 14.11 in April 2012.