In early 2000, the government divested 45% equity stake in Hindustan Zinc (HZL) for an amount of Rs 769 crore valuing the company at a total marketcap of mere Rs 1,708 crore. By shedding the majority stake (ie by reducing the stake to 29.54% from 75.92% then) and also the management control, today the government has become a major gainer – its 29.54% equity stake held alone is now worth Rs 21,000 crore! Hindustan Zinc, a midcap company till 2004, has emerged as the large-cap company with over Rs 50,000 crore marketcap within 6 years (in 2009) from the year of divestment. In these 6 years, its operating margin moved up from 41% to 60% and operating profits jumped 12-fold from Rs 300 crore to Rs 3,665 crore.

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There are many mid-cap public sector undertakings, which either make meager profits or losses or enjoy much lower valuation multiples in the capital markets as compared to their counterparts in the private sector. A government-owned company, which is mainly engaged in logistics business with a magnitude of logistic infrastructure which none of its competitors in the private sector possess, trades at mere 12x FY2014 earnings as compared to 40 to 80 PE enjoyed by some private logistic companies in this thematic (!) bull run. While some private power generating companies with substantial debts trade at 20 to 30 trailing PE, a PSU utility with substantial net cash and with 100% captive fuel mine, trades at mere 9x trailing earnings.

While a private shipping company could make profits, the government-owned shipping company made losses in FY2014. A listed venture of the government lost more than Rs 200 crore in NSEL scam. Few years ago, another similar venture, a subsidiary of a listed company, lost nearly Rs 1,000 crore in ending up with import of iron scrap when it intended to import copper and nickel! It has negative net worth of nearly Rs 2,000 crore when its paid up capital is just a couple of crore rupees!

Similarly while most of the mid-sized private sector banks have net non-performing assets around 1%, most of the mid-sized PSU banks have net NPA of over 2% to 3%. A small efficient private bank viz., City Union Bank with a business size of mere Rs 40,000 crore, trades at 2.5x its adjusted book value, while many mid-sized PSU banks with business in the range of Rs 2 lakh crore to Rs 3 lakh crore trade around 1x their adjusted book value!

Time has come for the government to take up some bold measures on the reform of public sector undertakings. The merger of mid-sized PSU banks with larger strong government-owned banks could save thousands of crore of rupees (which otherwise needed for capital infusion) for the Union Government. Secondly, shutting down top 10 perennially loss-making PSUs, can save over Rs 20,000 crore of money per year for the government.

Finally, the government has to emulate the successful model of Hindustan Zinc in the case of listed mid-cap companies engaged in diverse manufacturing, logistics and trading businesses. It should divest management control along with majority equity stakes in these companies. However, the government should retain 26% stake for another 5 to 10 years – allow the private entrepreneurships to create robust business and also wealth for all the stakeholders including the government and public investors.