CIRCUIT BREAKER. PSUs that investors would love to own

Commentators and columnists usually love to take potshots atpublic sector undertakings. Much of the discussion around PSU disinvestment revolves around how quickly and cleverly the Government can get rid of these capital-guzzling white elephants.

But a majority aren’t really in dire straits. In 2014-15, a forgettable year for the economy and India Inc, 157 of the 235 central PSUs made profits, outnumbering loss-makers (77) by a factor of two. Their aggregate profit of ₹1.30 lakh crore easily overhauled the ₹27,000 crore losses notched up by the red brigade.

However, the problem with thriving state-owned firms is that they like to hide their light under a bushel. This is why we combed through the latest Public Enterprises Survey and the websites of central ministries, to unearth five promising PSUs that Indian investors may love to own. They aren’t listed yet, but we hope they will be.

It runs India’s largest e-commerce portal and neither burns cash nor needs a constant supply of venture funding to keep it going. The Indian Railway Catering and Tourism Corporation (IRCTC) has a phenomenal (and loyal) user base. IRCTC, online ticketer for Indian Railways, accounts for over 55 per cent of all railway tickets sold. In FY16, it booked 20 crore rail tickets, double the 9.7 crore five years ago. Its revenue has doubled from ₹765 crore in FY11 to ₹1,490 crore in FY16, with net profits vaulting from ₹61 to ₹130 crore. Given that IRCTC has a monopoly on railway bookings, this is one user-base that won’t jump ship at the first hint of a rival’s off-season sale.

IRCTC is not a one-trick pony. While it levies nominal service fees on tickets (₹10-20), it also operates catering services for luxury trains, delivers pre-booked meals at designated trains, vends Rail Neer, and acts a travel agent for packaged tours. Some of its future plans include taking over the railways’ vast network of retiring rooms, concierge services at stations, corporate travel solutions, cab services and even medical tourism. With annual business of over ₹25,000 crore routed through its site, IRCTC’s gross merchandise volume, the metric by which e-commerce plays are evaluated, is $3.8 billion, and this is the minimum valuation it will likely command if listed.

The Tejas light combat aircraft’s recent debut in the Indian Air Force represents a big breakthrough for Hindustan Aeronautics Limited (HAL), which, allying with the Aeronautical Development Agency, has developed Tejas from scratch over two decades. HAL has over 20 units and 10 R&D centres across India, and it designs, manufactures and overhauls aircrafts for Indian defence. Expectations are that Tejas will emerge as the mainstay for the IAF’s long-overdue fleet modernisation plans. The Government’s Make in India drive with a thrust on the defence sector, promises burgeoning order flows for HAL. The opening up of Indian defence to 100 per cent FDI may also help HAL forge foreign partnerships to tap new opportunities. HAL has recorded consistent, if slow-growing financials. Its total revenues grew from ₹14,204 crore to ₹16,524 crore in the five years to FY16 while net profits rose from ₹2,114 crore to ₹3,210 crore. It earns gross margins of 20-24 per cent with return on equity of 18-20 per cent.

Railway Minister Suresh Prabhu is jump-starting the Indian Railways’ capex plans and needs to quickly find extra-budgetary resources to bankroll them. That spells opportunity with a capital O for the Indian Railway Finance Corporation (IRFC). Its mandate is to source funds at cost-effective rates to fund the capex plans and lease out assets to the railways.

Despite its borrowing targets galloping fivefold in the last 10 years, IRFC has managed its mandate impressively. It has met its fund-raising targets through a judicious mix of tax-free bonds, market borrowings and ECBs, and at costs that are 0.40-0.80 percentage points lower than other AAA borrowers. Forex and interest rate risks are hedged using derivatives. Despite its wafer thin spreads of 0.50 per cent, IRFC has seen total income jump from ₹3,818 crore in FY11 to ₹7,491 crore in FY16 and profits from ₹485 crore to ₹855 crore. With a top-notch credit rating (AAA), IRFC has zero NPAs. While other PSUs may be weighed down by over-staffing problems, IRFC gets by on a total strength of 19. In FY16, it reported an EPS of ₹202 with a loan book of over ₹85,000 crore.

UTI Mutual Fund is a good play on the Indian investor’s newfound yen for equities. Born out of the ‘good assets’ of the Unit Trust of India after the US-64 scam, UTI Asset Management Company has rebuilt its business doggedly over the last decade, professionalising its management and acquiring a reputation for managing steady returns with low risk.

This has paid off by way of expanding assets, which have gone from ₹67,000 crore to ₹1.12 lakh crore in five years. UTI AMC isn’t a top five AMC by assets, but its USP lies in its mammoth retail reach. Its investor base of 10 million folios is a fourth of total industry accounts. This leads to sticky assets and a track record of consistent profitability. Its net profits grew from ₹135 to ₹201 crore till FY15.

The AMC isn’t directly government-owned, but its four public sector sponsors — LIC, SBI, Bank of Baroda and PNB — own 18.5 per cent equity each, with global partner T Rowe Price owning the rest. Given that all four of its PSU owners have their own AMCs and could do with additional capital, divesting UTI AMC will save the Government some cash.

India Post is strictly not a commercial entity and doesn’t turn a ‘profit’. But it is brimming with potential, and has come a long way from ferrying snail mail and vending stamps. As the sole administrator of the Centre’s small savings schemes, it acts as a truly inclusive bank for Bharat, with over 35 crore small savings accounts. It is giving its unparalleled network of 1.54 lakh branches (1.2 lakh in rural India) a makeover by introducing core banking services (CBS). Plans are also afoot to set up 10,000 ATMs and 20,000 micro ATMs, to be inter-operable across banks.

Having bagged a payments bank licence from the RBI, India Post is also preparing to offer countrywide remittance services, accept savings deposits of up to ₹1 lakh, and distribute third party financial products. Over 40 large financial groups are said to have queued up to partner it. India Post has just started to cash in on the soaring logistics needs for e-commerce companies by tying up with over 400 such players to offer delivery in Tier 2 and 3 towns. India Post also acts as a conduit for direct benefit transfers by the Centre, routing MGNREGA payments and pensions.

In FY15, it made revenues of over ₹11,635 crore with a deficit of ₹6,258 crore after accounting for expenses. Hopefully, with so many new irons in the fire and its objective of emerging as a self-sustaining commercial entity, it will turn a profit in the coming years.

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