Steep dive in cash balance of CPSEs

The Centre’s push for more buybacks and dividends in FY19 has hit cash reserves further
Coal India’s interim dividend of Rs 8.132 crore was the highest
Coal India’s interim dividend of Rs 8.132 crore was the highest

The government’s golden goose — state run firms — have lost 36 per cent of their cash and bank balance over a five years’ period. From an unspent kitty of Rs 2.66 lakh crore in 2012-13, their stash had come down to Rs 1.71 lakh crore by March-end 2018. The combined cash reserves of public sector companies also appear to have hit their lowest level in nearly a decade at Rs 1.03 lakh crore in FY18.

It’s not that these entities haven’t hoarded cash every quarter over the last few years. Yet, their cash and bank balance has taken a hit as PSUs, under government pressure to meet its stiff disinvestment target, began utilising surplus cash to buy back their own shares, or acquire stakes in other state-owned entities.
For instance, Indian Oil Corporation led the buyback rally during the year  acquiring shares worth Rs 4,435 crore, followed by ONGC (Rs 4,022 crore), BHEL (Rs 1,628 crore), NLC (Rs 1,249 crore), Oil India (Rs 1,085 crore), Coal India (Rs 1,050 crore), NMDC (Rs 1,000 crore), HEG (Rs 750 crore), NHPC (Rs 600 crore) and National Aluminium Corporation (Rs 505 crore).

The central government has also been tapping PSU balance sheets to fill gaps or deficits in its public finance by way of drawing higher dividends. This has further strained PSU balance sheets since dividend payouts result in increased cash outgo.

For instance, Coal India’s interim dividend of Rs 8.132 crore was the highest followed by ONGC’s Rs 8,021 crore, Indian Oil’s Rs 8,060 crore. Power Grid Corporation and NTPC paid out Rs 3,050 crore and Rs 2,950 crore, respectively.

While increasing dividend payouts and share buybacks have helped the government meet its divestment target of Rs 80,000 crore in FY19, it has thwarted the companies’ plans for higher capital expenditure in the next few years. Power Grid, being a prime example, has decided to scale down its capital spend to Rs 18,000 crore in the current fiscal from Rs 25,000 crore last year.

Analysts at Edelweiss point out that a higher dividend payout ratio may also have a bearing on Coal India’s capex plan. “The company will have to incur an annual capex of Rs 12,000-15,000 crore over the next two years for expanding production and evacuation capability and maintain off-take growth of five per cent year on year,” it noted.

The government seems unwilling to learn any lessons. In the past, too, the unconventional move to raise cash from PSUs has eaten into cash reserves. The HPCL deal, for instance, has exhausted the country’s largest oil explorer — ONGC’s — cash reserves and forced it to resort to borrowing which hit its bottomline. However, the company claimed it has a strong financial position and sufficient funds to meet current and future capex needs. “The company’s operational plans and expenditure thereon have also been in line with its requirement,” ONGC said.

Last year, the government also forced ONGC to buy its 51 per cent stake in HPCL, mopping up Rs 36,915 crore and exceeding its annual disinvestment target of Rs 80,000 crore for the first time.

In a similar deal this year, state-run Power Finance Corporation (PFC) drew 70 per cent or Rs 10,150 crore from its ‘reserves and surplus’ to carry out the Rs 14,500-crore buyout of REC. It’s reserve and surplus were Rs 37,221 crore. While ONGC funded the acquisition through short-term debt and internal resources, the financial metric in the case of PFC was not as strong as that of the former.

The surplus cash of PFC dwindled from about Rs 3,500 crore in FY17 to Rs 550 crore in FY18 after it paid a handsome dividend of 78 per cent of its paid-up capital in line with the government’s rules. “This acquisition has further weakened PFC’s capital levels as it is buying the government’s stake in REC without raising any equity,” said Srikanth Vadlamani, vice-president, financial institutions group, Moody’s Investors Service.

During the first half of FY19, the cash and cash equivalents in the balance sheets of PFC and REC were Rs 1,799 crore and Rs 22 crore, respectively. However, internal capital generation during the next two years will help to partially rebuild the company’s capital, he added.

Rajeev Sharma, chairman and managing director, PFC, concurred. He expects to either maintain loan asset growth which had been 14 per cent in the last quarter or grow from here. “I don’t see it coming down. Almost every household has been connected through an electricity link. It is not a single connection anymore. Even a BPL household wants to have TV, fridge meaning demand will further increase. Companies will require more capacities, and we will be a single player in the market to help with funds at a time when banks are not finding the sector very attractive. We will, therefore, have abundance of business,” he told this publication.

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