The Hindu Business Line : ‘MFs may help PSUs earn substantial addl profits’

New Delhi, Aug 25 The Government’s decision to allow public sector Navaratna and Miniratna companies to invest up to 30 per cent of their surplus cash reserves in public sector mutual funds may yield substantial additional profits for these companies.

There are 42 listed PSEs that include big names such as ONGC, SAIL, Indian Oil, NALCO, GAIL and NTPC along with a large number of public sector banks.

According to estimates available from the Public Enterprises Annual Survey 2006-07 done by the Department of Public Enterprises, investment of 30 per cent of public sector reserves (that include all the 240 companies as well as loss-making ones) as on March 2007 could pump in Rs 45,204 crore into the capital markets through the mutual fund route.

The survey shows that Central public sector enterprises (CPSEs) have an aggregate cash balance of Rs 1,50,680 crore (including around 60,000 crore funds lying with the Navaratnas and Miniratnas) as on March 2007 and attracts an average interest of around 8 per cent annually.

Out of this, manufacturing companies account for a cash balance of Rs 94,029 crore and service sector CPSEs account for Rs 56,393 crore.

According to Mr R.K. Mishra, Director of the Institute of Public Enterprises (IPE), even if 30 per cent of the total funds were invested in mutual funds, even at a conservative rate of return of 12 per cent, it could generate about Rs 1,808 crore additional profit for the CPSEs apart from their business profits.

This additional fund also does not take into account the increase in net asset value of the investments, which would supplement the income further, Mr Mishra told Business Line.

However, the data provided by Value Research, the firm that tracks the Indian mutual fund market, shows that the real return from diversified mutual funds had actually been much higher than 12 per cent in recent years. On an annualised basis, return from mutual funds for a one year period had been 27.02 per cent, for two years 31.05 per cent and for the past three years the annual return stood at 42.01 per cent.

The combined market capitalisation of the listed 42 PSEs stood at Rs 8,66,879.47 crore in the beginning of August when the IPE study was conducted compared with Rs 7,52,337.75 crore in the beginning of the current financial year.

Total interest

According to estimates of IPE, the total interest earned by public sector companies on this cash balance, which include cash at hand, cash at bank and cash in transit, as on March 2007 at an average rate of 8 per cent amounted to Rs 12,054 crore. If 30 per cent of the balance was invested in mutual funds with an average return of 12 per cent, that would yield Rs 5,424 crore annually, which is Rs 1,808 crore more compared with an yield of Rs 3,616 crore at 8 per cent interest rate.

However, investments in mutual funds would require the public sector companies to predict their cash flows on a day-to-ay basis as well as differentiating between core and non-core cash balances, he said.

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