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Making Jewels Of A Higher Carat

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 Just before Christmas last year, the central government decided to give some of the jewels in its crown — the more successful public sector undertakings (PSUs) — better settings. Companies that met a set of criteria would qualify to be ‘maharatnas’, and their boards would have greater financial and operational autonomy to make strategic investment decisions — in acquisitions, for instance — quickly without having to go back to the government for approval. 

To qualify for maharatna status, the company must have annual post-tax profit of over Rs 5,000 crore, a net worth of at least Rs 15,000 crore and annual revenues of Rs 25,000 crore, for three years. The other requirement is that it be listed on stock exchanges and meet the minimum requirements of public shareholding (10 per cent). From the present list of PSUs, Steel Authority of India (SAIL), Oil and Natural Gas Commission (ONGC) and National Thermal Power Corporation (NTPC) meet the ‘maha- ratna’ criteria; Indian Oil Corporation (IOC), Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) could have made the grade, but their profits did not make the cut. 
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Interesting as the idea for better corporate governance is, a number of questions present themselves. While an enhanced investment limit is necessary, what has been provided is not sufficient. For mergers and acquisitions, the ceiling is 15 per cent of the company’s net worth in one project, till a limit of Rs 5,000 crore (limit is Rs 1,000 crore for navratnas). Overall investment in all types of projects put together cannot exceed 30 per cent of the PSU’s net worth. 
Moreover, the companies themselves are otherwise not in a position to face global competition, and need to spruce up their current operations. “Do you see an IOC making a credible bid for LyondellBassell, for instance?” asks the head of a leading investment banking firm. 
On a global playing field, scale is a huge factor: so what will Rs 5,000 crore (roughly $1 billion) buy? For ONGC, buying an oilfield would involve $4-5 billion in financing — five times its enhanced limit. NTPC is largely a domestic power company; its acquisition would be limited to buying coal mines, thereby managing its raw material supply. And as the recent global financial crisis has demonstrated, no company is too big to fail. What happens if a maharatna fails? Our efforts to talk to company managements did not meet with any success.
Getting It Together
“Not all PSU inefficiencies could be attributed to delays in government approvals,” says Anjani K. Agrawal, partner of metals and mining at global consultancy Ernst & Young. Take SAIL. Not so long ago, it was among the top 10 steel companies in the world. In 1997, SAIL was ranked tenth in crude steel production by the World Steel Association. Today, it is not even in the top 20. SAIL has added a paltry 25 per cent of capacity (2.8 million tonnes) in a decade, while Tata Steel and ArcelorMittal scaled up manifold through expansions and mergers. Tata Steel is today eighth on the charts; it ranked 63rd a decade ago (then as Tisco).
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In that decade, when ArcelorMittal consolidated operations to gain pricing power, and Tata Steel bought over Corus operations, SAIL preferred to remain a local player. “Tata Steel and SAIL are among the few local players to have near-integrated operations and to enjoy higher profit margins,” says an executive from Anand Rathi Securities. “While a well-run company, SAIL just failed to devise a global strategy.” SAIL’s net profit margin in 2009 was 13.8 per cent, while for Tata Steel it was 21.6 per cent. 
“SAIL could use higher investment limits for capital expenditure to improve productivity,” says V.R. Srinivasan, CEO of Mumbai-based Brics Securities. “It could buy some coal mines — like Tata Steel has — and manage critical input costs.” Others agree that a strong resource base, whether in India or abroad, is crucial.
They may have a point. Despite the global recession, India is the only country that has growing demand for steel; the rest of the world is cutting production to cope with reduced demand. SAIL is scaling up — adding capacity of another 7.5 million tonnes by December 2012 to its current capacity of 14 million tonnes.
Striking Oil
For ONGC, the challenges are manifold. It faces a pressing need to accelerate its global operations, since its domestic production is plateauing, even declining. Its oil and gas production was 47.9 million tonnes of oil equivalent (MTOE) in 2008-09 compared to 49.5 MTOE in 2004-05.
“Falling sales volumes and subsidies are a strategic concern for ONGC,” says Deepak Pareek, an analyst at Mumbai-based brokerage firm Angel Broking. ONGC Videsh, the overseas subsidiary, is an effort to go out and acquire oilfields, but has been criticised for failing to get a firm foothold in resource-rich Africa, where Chinese state-owned companies have made huge strides. 
Recently, it lost the bid for an Algerian oilfield to China National Offshore Oil Corporation. Last month, it lost another bid for the Halfaya oilfield in Iraq to a consortium of companies led by China National Petroleum Corporation. “In mergers and acquisitions (M&A), speed and privacy are two important factors,” says Agrawal. “Here PSUs have lagged the private players.” For ONGC, the enhanced limit should come as a breath of fresh air.
Even its limited oil production in 2009 fell 3 per cent from the previous year to 6.6 million metric tonnes (mmt), while its gas production increased 10 per cent to 2.2 billion cubic metres (bcm). For ONGC Videsh, the light at the end of its tunnel is the doubling of its oil reserves (proven, probable and possible) in 2009 from the previous year to 236 mmt — a major jump.
However, it is yet to make profit in Africa and Latin America — losses have been Rs 260 crore and Rs 120 crore, respectively. Not a commanding return on investment — yet.
Powering Up
For NTPC, with installed capacity of 30,000 mega watts (MW), the maharatna status is a chance to become an integrated player in the power generation business like Tata Steel in the steel business. It needs a lot of coal for its future capacity additions, with ambitions of reaching 50,000 MW by 2012 and 75,000 MW by 2017 in generating capacity. Until now it has sourced most of its needs within India. 
Already, there is competition as the Tatas and the Adanis, another company in the power generation sector, are active in coal mining in Indonesia, which helps them hedge against international jumps in coal prices. “NTPC’s financials suffered in the second half of 2009 when the company could not pass on increased costs of coal to its customers,” says Rupesh Sankhe, another analyst at Angel Broking. 
To Be A Ratna 
 ...And How To Choose The Setting
The original list of navratnas was made in 1997 and, as the name suggests, had nine companies on it. There are 18 navratna companies now
In addition, another category called miniratnas was created, with two sub-divisions. As of November 2009, there were a total of 62 mini-ratnas
The aim was to make public sector enterprises more competitive by giving their managements more autonomy so that they are able to take quick decisions and compete with rivals globally
Last year, another category, maharatna, was created for highperformance PSUs. As of now, only three PSUs — ONGC, NTPC and SAIL — make the cut. It is noteworthy that two of the three companies are energy-related
All these status are conferred by the department of public enterprises (DPE), which mostly looks at a company’s financial performance with respect to pre-set targets on a five-point scale. A score is given to each parameter and, finally, a composite score or an index of performance is given to the enterprise
NTPC is also facing a shortage of gas to fuel its gas-based generation, leading to lower capacity utilisation. This may not be a consuming worry just now, since gas-based power accounts for only 14 per cent of its total capacity. But future plans could see a significant increase in the use of gas as a fuel. Clearly, going forward, thinking about its resource mix will be critical, as will the enhanced investment limits with which to buy them. 
Quicker project implementation is another challenge for NTPC. It added just 1,000 MW in all of 2009, and less than 4,000 MW in the last four years. Three of the large ultra mega power projects (UMPPs, which are 4,000 MW each in capacity) have gone to competitors Reliance Power and another to Tata Power. Other companies such as Sterlite Industries also have aggressive ramp-up plans. So having the financial capacity to kick off quicker may help in faster addition in generating capacity.
Beyond The Shortlist
For the first three maharatna aspirants, the challenges seem fairly clear, as do the ways in which the enhanced status can possibly be used, like for gaining access to scarce natural resources, for instance. But operational autonomy and freedom should mean more than to just be able to move things on a big scale. “Empowerment comes with greater accountability,” says E&Y’s Agrawal.
PSUs have been admired by private players for their robust documentation process. Many top officials of PSUs have been poached by the private sector — particularly in the power business — to create and structure that capability to enable companies to be more successful in bidding for infrastructure projects. Ironic, that the same ability is also the source of inefficiencies when it stays within government channels. The maharatna status is expected to remove that bottleneck, to some extent. 
For the government, it is also an opportunity to behave as a majority shareholder than owner. “Perhaps it is wishful thinking, but the maharatnas could help pave the way for managing PSUs along the lines of the private sector,” says the head of an executive search firm. “It may also enable thinking about strategic partnerships with firms even outside this country.” 
However, there are attendant risks as well. What if the competition is so stiff — and in many industries, it is — that our maharatnas become inconsequential players on the world stage? Which begets another question: do we need a better set of criteria that goes beyond the balance sheet? But till then, the PSUs have work to do: mostly homework.
muthukumar dot kailasam at abp dot in
(This story was published in Businessworld Issue Dated 25-01-2010)

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