The growing public-private divide

The results of 3,800 listed companies in the quarter ended December 2013 highlight the growing divide between government-owned companies and those belonging to the private sector. While private sector companies rode the recovery wave with net profit growth accelerating into double digits, state-owned firms saw their net profit shrink further.

The differential in the growth rates has been rising over the past three quarters. Net profit for private sector firms jumped 18 per cent in the December quarter over the same period a year ago, cementing the slight recovery in the September 2013 quarter. Public sector units (PSUs), however, saw net profit fall 17 per cent. Both private firms and PSUs were registering profit declines at the beginning of this fiscal year.

Similarly, while sales growth for PSUs was stuck between 7-8 per cent in the past three quarters, private companies recorded double-digit growth of 10-14 per cent. Oil marketing companies have been excluded from this analysis as their earnings fluctuate sharply based on subsidies and don’t reflect their true operating performance.

This divergence could be because PSUs, which account for about a third of overall revenues, are mainly from domestic core sectors, such as banking, mining and engineering, which have borne the brunt of the downturn.

In recent quarters, bad-loan provisions and write-offs have made a sharp dent in the profits of public sector banks, which make up about a fourth of all listed PSUs. Similarly, PSU capital goods companies, hit by dwindling order flows, saw sales dip 15-22 per cent in the past two quarters while their net profit shrank over 30 per cent.

In contrast, private sector firms managed a good show on a weak rupee, given that they have greater representation in export-oriented sectors such as technology and pharmaceuticals. Software companies, for instance, clocked sales growth of more than 25 per cent in the September and December quarters with net profit growth at over 30 per cent. FMCGs, also in the private sector, managed a reasonable 11-13 per cent sales growth with 15-20 per cent net profit growth.

Apart from sluggish domestic demand, PSU companies lost out due to their cost structure. They have been steadily spending more on their staff in contrast to private sector players.

As a proportion of sales, staff costs for PSUs (excluding banks) rose from 16.5 per cent in the March 2013 quarter to 18.7 per cent in December. But for private sector firms, the staff cost-to-sales ratio barely budged at about 8 per cent over the same period.

SAIL, for example, forked out about 20 per cent of sales on staff costs in the December 2013 quarter, while its private sector peer Jindal Steel paid just 4 per cent.

The one area where state-owned companies did better than their private sector counterparts is interest outgo. Interest paid as a percentage of sales for public sector companies (excluding banks) has been less than 3 per cent for the past several quarters.

That’s well below the 8-9 per cent of sales their private peers shelled out on interest. PSUs have a low debt burden, with their (standalone) March 2013 debt-equity ratio at 0.64. Given their government backing, they were also probably able to wrangle better rates on loans than private firms.

The growing public-private divide is also being reflected in the stock price performance of the listed companies.

The BSE PSU index, an index of Central public sector enterprises, has plummeted 24 per cent in the last year against the Sensex’s 7 per cent decline.

The price-earnings multiple of the BSE PSU index, at eight times, is also half the Sensex multiple.

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