If public-sector companies were meant to be temples of modern India, Lakshmi-the Goddess of wealth-is only now being instated in them. In the past two years, many government-owned companies have become wealth creating machines. Since January 2002 Bombay Stock Exchange's PSU Index, which is a composite value of the shares of 34 PSUs, has risen four times (see chart). That means Rs 100 invested in public-sector undertaking (PSU) stocks in January 2002 would have became Rs 400 on February 20, 2004. Some individual companies have created more wealth. The price of a Steel Authority of India (SAIL) share has risen 8.7 times in two years-from Rs 5 to Rs 43. In three years, the Shipping Corporation of India's share price has risen almost 10 times-from Rs 17 to Rs 150. India's most valuable company, ONGC, is also a PSU.

To be sure some of India's biggest and most profitable companies were always government-owned. If they weren't as fancied as private companies it is because most PSUs operated in cosy monopoly markets, with returns often guaranteed by the government. Along with their gigantic sizes they were known for being too slow and slothful to survive competition. And what they were not known for was being friendly to customers and rewarding to investors. That is beginning to change. "Traditionally, most PSUs had strong businesses, but wariness regarding the management quality and flexibility kept their stocks undervalued," says Sukumar Rajah, director, Equity, Franklin Templeton Investments.

The twin forces of privatisation (which leads to a change in the company management) and disinvestment (which makes PSUs more transparent, and often more agile) are the key drivers behind the value surge in share prices. "The disinvestment drive has created substantial interest in PSU stocks. We believe most companies are fundamentally strong," says S.A. Narayan, CEO of Kotak Securities. In a way, by selling its shares, the Government is unlocking the true value of many PSUs which was buried under controls for years. That may explain the Rs 14,000 crore sale of PSU shares between mid-February and mid-March. The money raised will almost entirely be used to fund the government deficit. That is despite a proposal to spend 50 per cent of disinvestment income on restructuring PSUs, 25 per cent for repaying public debt and 25 per cent on building infrastructure. The proposal is yet to be implemented.

For investors interested in buying PSU shares, one key concern is about what will be the return on their investments. To ensure their participation, small investors are being offered a discounted price on most issues. There are concerns though that the government may be selling too many PSU shares in too short a period for small investors to make most of the offer. Already, sale of shares in the secondary market to generate cash for buying through public issues is dampening the overall prices and threatening to bring down the value of PSU shares. That could jeopardise the ambitious Rs 14,000 crore disinvestment plan.

The best barometer of a PSU's ability to reward its investors is its capability to perform in the future. Market analysts are bullish. "PSUs have great assets and now the market believes they can leverage on these strengths," says Anup Bagchi, CEO, ICICI Direct. Adds Ravi Kapoor, executive vice-president, equity markets, DSP Merill Lynch: "Fundamentally strong PSUs are on offer, which is a good opportunity for investors." To understand how real the current "feel good" on PSUs is, India Today sampled the performance of a few companies. Choosing from the 100-odd profit making PSUs was a tricky task. What follows is only an illustrative, not exhaustive, list of PSUs that have topped the charts in value creation or sales growth or efficiency. Or have turned around amidst trying conditions.

ONGC
BURNING BRIGHT

Subir Raha may not admit it, but as chairman of ONGC, he must swing between delight and discomfort. At Rs 1,06,000 crore, or $24 billion (February 2004 price), ONGC is India's most valuable company. If it is sold at its current market price, the money raised could buy India's biggest steel maker SAIL, the largest consumer products company Hindustan Lever and the most fancied software company Infosys.

True, the market value of a company (number of shares multiplied by the market price of shares) is too fickle to gloat about. But ONGC has other, more fundamental achievements to its credit. In 2002-3, the company made more profits (Rs 10,529.3 crore) than any other Indian company and its profit margin was a stunning 30 per cent. That is, on every Rs 100 worth of sales, it made a profit of Rs 30. That helped the company pile up a reserve of Rs 34,151 crore even after paying a 300 per cent dividend. It is on the back of such stellar performance that the Government hopes to raise at least Rs 10,000 crore by selling its 10 per cent stake in the company through a public issue that opens on March 5.

With such delightful figures oozing out of its balance sheet, what's there for Raha to draw discomfort from? Plenty. And Raha doesn't shy away from counting them. If ONGC is very profitable, it also operates in one of the riskiest of all businesses-oil exploration. It can spend crores of rupees on drilling an oil well that turns out to be dry. The company is also just emerging from the worst decade in its 48-year history-the 1990s. Faced with the foreign exchange crisis, the government stalled all new exploration projects of ONGC in 1991, which wasn't a corporation then. Shelving new projects severely compromised the company's future. If an exploration company doesn't discover at least as much oil and gas as it is produces, it is feeding on its future. That is exactly what ONGC did in the 1990s.

That dismal past is still haunting the company. Since 1994 the quantity of crude oil production has either fallen or remained stagnant. And India's dependence on imported oil increased from just 30 per cent of its domestic demand in 1991 to 70 per cent now. If ONGC maintained a good profit record it was because of high crude prices ($22-28 a barrel) in recent years and its monopoly on the country's oil production-which is now diminishing.

Shorn of its monopoly and swamped with competition from private players how will ONGC thrive in future? Raha, who will steer the company till 2006, defines his challenges as "sustaining growth, mitigating risks, improving returns-and doing it all as a PSU".

To ensure that it discovers more oil than it produces, the company is investing about Rs 400 crore ($0.75 million) a day on exploration. Around 27 oil rigs will be drilled under project Sagar Samridhi. Through its subsidiary OVL, it is aggressively going beyond Indian seas to acquire oil and gas fields. OVL's target is procuring 20 million tonnes of oil and gas by 2020. It hopes to start procuring that much by 2011. ONGC's old workhorse-Mumbai High-is being overhauled and expanded by spending Rs 8,200 crore between 2001 and 2006. The efforts have borne fruit. In the past three years new discoveries have been more than production.

Yet, to minimise the risks inherent in the exploration business, ONGC is getting into refining and retail. It acquired MRPL in March 2003 and will start setting up its petrol pumps in 2004-5. That will put it in league with global oil majors that own the entire oil chain from exploration to retail. Government willing, ONGC could witness a windfall. Right now the company loses an estimated Rs 3,000 crore year on funding various subsidies. A proposal by a group of ministers of relieving ONGC of gas subsidies awaits the Cabinet's nod.

The corporation has set an ambitious target for 2020. It plans to discover six billion tonnes of oil and gas by then. "We are flush with resources right now and our challenge is to convert these resources into assets and wealth for the company, its investors and its customers," says Raha. Industry watchers give Raha a fair chance of success. "The two key determinants of ONGC's futures are oil prices and new discoveries. Prices, though unpredictable, are unlikely to fall steeply and the company's discovery drive seems real," says Rajeev Thakur, head of research with ICRA. At least in the medium term, ONGC's performance isn't likely to flicker much.

Indian Oil
WELL OILED

The Ambanis, the Tatas and the Birlas are the names that come to mind when one thinks of the giants in Indian business. Yet India's biggest company has nothing to do with any of them. The Rs 1,20,000 crore Indian Oil Corporation (IOC) is about twice the size of the Reliance or the Tata Group and is India's only entry into the haloed list of Fortune 500 companies (2003 rank 191). Yet it is easy to understand why IOC isn't as fancied as the companies almost half its size. It is a PSU and has historically operated in a market-oil refining and retail-that was government monopoly. Its profits were more or less guaranteed by the government.

But IOC's recent performance deserves credit. In 1998, the oil sector was deregulated with the government dismantling what was called the administered price mechanism (APM). "Overnight, the three decades of guaranteed returns vanished. And we suddenly found ourselves looking at cost optimisation and worrying about profit margins," says M.S. Ramachandran, chairman, IOC. Despite the shake up and infusion of competition, the company's revenues surged by 73 per cent from Rs 69,430 crore in 1998-99 to Rs 1,19,848 crore in 2002-3. Of course lifting of government control on prices of petrol and diesel and cuts in subsidies of a few other petroleum products powered much of the revenue surge.

Ramachandran sees tougher times ahead. Reliance Industries is flexing muscles and is all set to enter retail. ONGC, with Rs 34,000 crore reserves, has already entered refining and will debut into retailing within a year. Global majors like Shell, Exxon and Mobile too are raring to enter India. Already, surplus refining capacity and a tapering demand for petro products is pushing IOC to explore new revenue streams. "Cheap, clean and more energy efficient gas fuel will increasingly replace naptha, denting IOC's business," says Devinder Chawla, an energy consultant.

What is IOC's strategy to stay head in the unfolding dogfight? To consolidate its retail presence, it took over IBP in 2002. Ramachandran's plan is to transform IOC into a multinational energy giant. The company is implementing projects worth Rs 24,400 crore that includes a new Rs 7,000 crore petrochemical project and expanding retail businesses in Mauritius and Sri Lanka. IOC is also interested in buying British Petroleum's retail businesses in Singapore and Malaysia.

In 2004-5 the company will spend Rs 1,000 crore spruce up outlets and make them customer focused. To speed up the decision making-a handicap in all PSUs-four regional offices split into 15 marketing offices. "The future growth of IOC critically depends on how fast it spreads across all segments of oil business," says Chawla.

SAIL
PUMPING IRON

Among the 1,33,000 employees of India's largest steel producer, SAIL, there is a new found admiration for China. Thanks largely to the dragon country's almost insatiable demand for steel, SAIL is in the midst of a spectacular turnaround. After five continuous years of losses, the company posted a net profit of Rs 1,498 crore in the nine months between April and December 2003. That's higher than the company's highest-ever annual profit of Rs 1,319 crore in 1995-6.

In 2002-3, SAIL exported 8.5 million tonnes of steel, of which 40 per cent went to China. Along with the demand-pull came a surge in steel prices. The price of hot-rolled coil alone-one of the key products of SAIL-has risen from $170 a tonne in 2001 to $450 a tonne now. The price spike, after a global depression in prices in the mid-1990s, has changed the fortunes of all steel companies in India. Between 2001-2 and 2002-3 the company's revenues shot up by 24 per cent (see table), and 2003-4 is likely to be better.

But price is just 50 per cent of SAIL's turnaround story. The company's decade-old restructuring plans are also yielding results. Says V.S. Jain, chairman SAIL: "For over a decade now we have been changing the company, but our efforts weren't noticed." Since 1996 the company has reduced its manpower by 25 per cent-from 1,78,000 to 1,33,000. That has helped raise the average labour productivity from 95 tons of crude steel per employee to 123 tons in the past five years.

The Rs 12,000 crore modernisation plan started in the late 1980s and cost control measures put in place in the late 1990s helped the company produce more with lesser resources. SAIL's total expenditure actually fell by Rs 300 crore between 2001-2 and 2002-3, whereas its sales rose by Rs 3,700 crore during the same period. In 2003-4, the cost of production will fall by another 3-4 per cent, saving up to Rs 400 crore. Leasing and sale of houses-the company owned an estimated one lakh houses-and forming joint venture for non-core businesses like power plants also generated cash. All this has reduced SAIL's massive indebtedness. Since March 2003 alone the company has repaid Rs 3,000 crore of debt, which has pared its debt-equity ratio (units of debt for each unit of equity) from 6.5 to 2.5.

Though leaner and profitable, SAIL still pales in comparison with the efficiency levels of private steel producers. At Tata Steel-the world's second most efficient steel maker-each employee produces an average of 245 tonnes of steel in a year. With both price and demand of its products on a high, SAIL's performance is right now steady. Jain estimates China to continue guzzling steel for the next two to three years. Before that a pick up in domestic investment should keep the current momentum going for the steel industry.

But for SAIL to make most of the likely demand boom, Jain has to perform the tough task of combining financial consolidation with new investments, especially in expanding and improving the company's products. For instance, the company doesn't make the kind of steel the auto or consumer appliance industries need. Rivals like Tata Steel are setting up facilities to make auto-grade steel. "SAIL's future revenues will depend on how long steel prices rule high and how quickly can the company upgrade its product profile," says Vipul Prasad, analyst with Motilal Oswal Securities.

GAIL
PIPED PIPER

The youngest among PSUs, the Gas Authority of India Ltd (GAIL) is most unlike a government owned company. Its business is sharply focused-gas transmission and retailing. Its employment hasn't been driven by socialist ideals of creating jobs-its executive staff is twice the number of its workers and almost all of them are digitally literate. Its investment decisions are based on commercial considerations-it was recently ranked second in the world on return on invested capital among all gas companies.

GAIL transports and markets 90 per cent of the natural gas sold in the country. Its most visible face are the CNG gas stations in Mumbai, Delhi and Hyderabad which supply green fuel to two lakh vehicles. But the bulk of the company's business comes from a growing base of industrial customers (e.g. gas-based power plants, fertiliser producers and petrochem producers) that it caters through its 4,500 km gas pipeline. GAIL is also selling cooking gas (piped natural gas, or PNG) to 2.45 lakh customers in Delhi, Mumbai and Vadodara and hopes to expand to 22 more cities by 2010. Says Chairman and Managing Director Proshanto Banerjee: "Thinking global and constant benchmarking against the best in the world is what drives us and will eventually shape our future."

His confidence stems from the fact that gas consumption is expected to more than double in the next five years. Globally, gas is in great demand from power and fertiliser companies and even for heating of buildings. With a firm grip on gas transmission and virtually in control of the Rs 20,000 crore National Gas Grid to be completed by 2008, GAIL will be at the centre of the gas business in India. It has also invested in 10 exploration blocks, including a big find in Myanmar to secure gas sourcing. GAIL has also entered telecom. It owns and operates 8,000 km of optical fibre cable network along its gas pipelines. Looking beyond, it has picked up a 17 per cent and 22 per cent stake in two gas companies in Egypt and is exploring opportunities in Bangladesh, Turkey, Iran and the Philippines.

With a virtual monopoly in the gas business, GAIL faces little threat of external competition right now. But gas pricing may become an issue. Says Sandeep Biswas, senior manager, Accenture: "Freeing up gas prices, so far subsidised, will firm up price levels. That may adversely impact the growth in gas usage in the future and dent GAIL's profit margins."

NTPC
POWER PACKED

India's power sector is notorious for blackouts, bankruptcies, thefts and investors running scared. For it to have the world's second most efficient power producer should then come as a big surprise. But that's exactly how the National Thermal Power Corporation (NTPC) was ranked recently by UK-based consultant Datamonitor. NTPC's capacity utilisation-called plant load factor-is 84 per cent which is way above the national average of 70.5 per cent. That makes NTPC one of the lowest cost electricity suppliers in India. That's not all. A Business Today-Hewitt Associates study in 2003 rated the company as the third best employer in the country, rubbing shoulders with the best and the biggest private and foreign companies in India. That's some recognition for a PSU, conventionally known for low efficiency and sloth management.

It is, therefore, intriguing that NTPC is confronted with a conflicting choice. Its Chairman C.P. Jain wants to expand beyond power generation and venture into coal mining, LNG imports, power distribution, transmission and even overseas plant construction and management. But a committee headed by Planning Commission Member N.K. Singh has recommended breaking NTPC into four smaller companies. The rationale: to create competition in power generation. Sure, the company is India's single largest power producer accounting for 27 per cent of electricity produced. But it is not a monopoly in a market where every state electricity board (SEB) has its power plants and private companies like Reliance Energy and Tata Power are growing bigger. Market and industry watchers are confused. "Phones have not stopped ringing since the proposal to split was floated. Banks, financial institutions and our employees are making frantic calls," says Jain. The Government, which owns NTPC, has decided to sell 24 per cent of its equity holding. At least 5 per cent government stake will be divested in 2004.

Jain is resisting any attempt to split NTPC. He plans to add 56,000 MW of new generation capacity (current capacity 20,935 MW) by investing Rs 1,40,000 crore in the next 13 years. For funding such high voltage growth, the company has reserves of Rs 23,577 crore which will be supplemented with borrowings and equity expansion. It has also bid for the power distribution business in Gujarat and Karnataka.

To realise these ambitious plans, NTPC will have to come out of its rather cosy past when customers and profits came easy. SEBs were its dedicated customers and 16 per cent guaranteed return of equity ensured a steady flow of profits. In fact, SEBs often complained that NTPC overcharged them for the power it supplied. The guaranteed returns continue even though cost of capital has come down significantly and its outstanding payment from SEBs was settled in under a complicated one-time agreement signed in 2003.

Though the cushioned existence of the past did not affect NTPC's operational efficiency, it certainly lulled its entrepreneurial instincts. The evidence: enormous reserves of Rs 23,577 crore. Says S.L. Rao, former chairman of the Central Electricity Regulatory Commission: "NTPC had good managers but poor entrepreneurs. It has never undertaken the kind of bold initiatives it is now planning."

Other observers are more charitable. "Considering its managerial competence and record of efficiency NTPC shouldn't find expansion difficult," says Sharad Jain, director, corporate and infrastructure ratings, Standard & Poor's. The company's biggest challenge is a repeat of its past performance on an ever increasing scale.

SCI
A SEA CHANGE

When Prabhat Kumar Srivastava looks out of his office on the 16th floor of Shipping House in Mumbai, he doesn't see the breathtaking view, the crescent of the Queen's Necklace or the frenzy at the core of India's Big Apple, Nariman Point. He looks out into the sea beyond, a future dominated by merchant ships topped with the Shipping Corporation of India's Ashoka Chakra symbol, like the one atop his company's headquarters.

"I see ourselves as a lean mean fighting machine, an Indian MNC focusing on a few core areas like energy rather than a Jack of all trades." Still, the SCI, created in 1961 by the merger of the Eastern and Western Shipping Corporations and whose chairman and managing director Srivastava has been for the past eight years, has never had it so good.

In the past five years, SCI has surpassed the cumulative performance of its previous 36 years. The company which accounts for 40 per cent of Indian tonnage posted a net profit of Rs 133.23 crore during April-December 2003, the highest recorded in its history. Employee strength has been pared down from nearly 10,000 in 1996 to the present 7,225. But sales, which reached a record high of over Rs 3,000 crore four years ago, have dipped slightly owing to the cyclical nature of the global shipping industry-freight traffic fluctuates with global trade.

By the sheer nature of its charter, SCI has always been a global operator. Now, the triple forces of corporatisation, deregulation and competition are slowly unlocking its potential and leading to what Srivastava calls a "sea change" in mindsets: "We have always been a global industry from day one. But now there is a difference. Earlier, I would buy a ship and think about which Indian cargo I would carry but today my ships ferry cargo between China and the US."

The January 2004 Government's decision to levy tonnage tax instead of a corporate tax-tax will be computed on the net registered tonnage of a company's ships rather than the crushing 35 per cent corporate tax-will ensure a level playing field for Indian shipping companies. As Indian and global trade boom, SCI is set to make the most of a consequent surge in freight rates. "The company has been reasonably well managed and has all along had strong cash reserves. Moreover, its stock price has gone up from Rs 17 to Rs 150 in just three years,'' says Nilesh Shah, vice-president, Kotak Securities.

But the most critical determinant of SCI's future will be when and who it is sold to. The company was one of the PSUs to be privatised in 2003 when the Supreme Court judgement halted the entire privatisation process indefinitely. According to Shah the privatisation-already delayed by two years-could unleash SCI's potential.

When the inevitable happens, it will, for starters, end the agonising wait for approvals for capital asset acquisitions-currently between eight months to four years; pare down employee strength to a third of the present strength, modernise its ageing 2.71 million GRT fleet comprising 10 different types of ships and allow it to focus on niche markets like the energy sector. This could be the great leap forward, one that could take SCI closer to the lean mean Indian MNC dream Srivastava sees at Shipping House.

BSNL
TOP TRAP

In two months, the Rs 26,000 crore BSNL-India's largest telecom company-will float a tender for 15 million GSM mobile phones. That will be the largest single tender of its kind in the world. Soon afterwards, the company will float a tender for three million CDMA (a.k.a. WLL) mobile phones. That is an indication of where BSNL hopes to be in the next year. It already has more than four crore telecom subscribers-though most of them are fixed-line subscribers acquired in an era when the company enjoyed a monopoly in Indian telephony.

It is high time the company displayed the aggression it plans to. Despite its leadership, BSNL has been slower in expanding than private players like Bharti Tele-Ventures and Reliance. That is because while the rate of growth of new fixed line phones-still BSNL's mainstay-is flagging, it is unable to meet the explosive demand for mobile phones. Barring Delhi and Mumbai, the company has the licence to operate in the whole of India, a unique competitive advantage in a fiercely competitive market. In most telecom circles, customers have queued up to subscribe to its mobile services, many of them hoping to switch from its own fixed line service. BSNL's unique draw: coverage, cost and connectivity. It offers the most seamless connectivity across India, and its tariffs are the lowest-even if the service isn't the best.

Ironically, by choking on supply, it is unable to fully utilise its competitive advantage and is losing its potential customers to rivals. Says BSNL Chairman V.P. Sinha: "Our biggest challenge is to meet the unmet demand of our customers." If it can blend its size with flexibility and efficiency, BSNL can still rule the airwaves like no other company.

-with Vivek Law