PSU cash conundrum:: Business Line

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A government short on cash and long on spending can be innovative. Weak markets and poor investor appetite first put a spoke in the government's plan to raise Rs 40,000 crore during the ongoing fiscal. It intended to do this through follow-on public issues of public sector companies. So the government decided to strike directly at the PSU pots of gold: Cash holdings. . So, what is the case for companies with government's holding a majority stake in them to pay out a heftier dividend?

SWIMMING IN CASH

A quick look at the top ten PSUs by cash holdings during the financial year ended March 2006 reveals they held over Rs 66,000 crore. They included Coal India, Hindustan Aeronautics (unlisted), ONGC, NTPC, SAIL, GAIL, BHEL, NMDC, Oil India and Neyveli Lignite Corporation. By March 2011, the same list saw a bit of internal shuffling, with NLC and GAIL bowing out. MMTC and Bharat Electronics replaced them. More dramatically, the cash holdings rose by almost three-fold to just over Rs 1,82,000 crore. A broader list of 34 PSUs — excluding banks, Power Finance Corporation and Rural Electrification Corporation — grew by a very similar magnitude to Rs 2,20,000 crore. The rate of growth in PSU cash balances is however declining as the graph below depicts.

 HOW THEY MADE IT

Among the top 10, the strong trend lies in the out-performance of firms in the natural resources segment. In terms of growth in cash and bank balances between 2005-06 and 2010-11, Coal India, ONGC, SAIL, NMDC and Oil India turned in the strongest performances. These five have had a stellar five-year run, when higher realisations and legacy advantages helped them accumulate vast amounts of cash. A case in point, Coal India and NMDC have both seen the realisations rise at a healthy clip.

 

SOFT TARGETS

PSUs in the mining and oil exploration business, such as Coal India, MOIL, NMDC, ONGC and Oil India, are especially attractive targets, given their outperformance on the cash accumulation front. Additionally, the government is looking to introduce regulation such as the Mining and Mineral Development and Regulation Bill which will require these firms to make additional payouts.

 Among the companies whose cash balances have grown at a pace lower than the average, are capital goods firms with intensive working-capital requirements, such as BHEL and Engineers India, whose cash balances have grown by 2.3 times to  Rs 9,700 crore and Rs 1,800 crore respectively. A few companies such as MTNL and HMT, which have registered heavy losses, have seen their cash balances shrink considerably. Gas marketing and distribution company, GAIL, which is spending heavily on expanding its pipeline, has seen its cash balances shrink by 43 per cent to Rs 2,565 crore.