Dr Subhas Chandra Pandey, Distinguished Member, SAMDeS

On 29th April, provisional results were released of the seven new defence PSUs that were created after corporatisation of Ordnance Factory Board, a departmental commercial undertaking, on 1st October 2021.

The combined production value of the units transferred to these 7 companies was Rs.12,734 crore in 2020-21: Munitions India Ltd. (Rs.4,752 crore), Armoured Vehicles Nigam Ltd. (Rs.3,365 crore), Advanced Weapons and Equipment India Ltd. (Rs.1,660 crore), Yantra India Ltd. (Rs.1,367 crore), Troop Comforts Ltd. (Rs.776 crore), India Optel Ltd. (Rs.691 crore) and Gliders India Ltd. (Rs.123 crore).  [my blog dated April 4, 2022 ( “Corporatization of Ordnance Factories: Assessing Operational Challenges refers]

All companies except YIL have reported provisional profits as detailed below (in Crores)

New Defence CompanyAvg six monthly Profit(+)/Loss(-) during the last three yearsProvisional Profit(+) / Loss(-) (Oct 01, 2021 – Mar 31, 2022)
Financial Performance of new DPSUs

Government has taken various steps to initially handhold and support the new defence companies in starting their business as corporate entities. Outstanding indents with erstwhile OFB were grandfathered and converted into deemed contracts valued at about Rs 70,776 crore.

Against the targets for FY2021-22, Rs 7,765 crore was extended to these new DPSUs as 60% mobilisation advance before the commencement of business date. An amount of Rs 2,765.95 crore was released to these seven new companies during the current financial year for capital expenditure and equity. All capital expenditure funded by the Government on assets used by the DPSUs has not converted into equity. This is nothing unusual for DPSUs many of which enjoy access to off-balance sheet assets for supporting their production activities. Otherwise, the equity base would get bloated beyond reasonable prospects of servicing the dividend bearing capital.

With the functional and financial autonomy provided to these new corporate entities, coupled with handholding by the Government, a turnaround has been brought in the functioning of the Ordnance Factories. Within the first six months, these new companies have achieved the turnover of more than Rs 8,400 crore, which is significantly higher than the Value of Issue of erstwhile OFB during previous financial years.

Within a short time since their inception, Six of the seven new defence companies reported provisional profits during first six months of their business. These companies have been able to secure domestic contracts and export orders valuing more than Rs 3,000 crore and Rs 600 crore, respectively. Munitions India Limited (MIL) has bagged one of the biggest ever export order of ammunition of Rs 500 crore. These companies are also taking measures for developing new products through in-house as well as collaborative efforts. The YIL has bagged orders of about Rs 251 crore from Indian Railways for Axles.

It may be seen that compared to 2020-21, the first year of corporatisation has been bountiful for the erstwhile Ordnance Factories when seen in turnover terms. Comparable figures of profitability computed based on comparable accounting system are not available. One can draw a crude proxy for the profitability of erstwhile OFB from the difference between the Revenue expenditure and Revenue receipts of OFB. In 2020-21, the Revenue expenditure was Rs.11,410.21 crore on cash basis, the amount spent by OFB in cash, leaving aside unpaid bills, for inputs to production. OFB accounted for Rs.8754.59 crore as reduction in expenditure (roughly supplies to the Defence Services) and Rs. Rs.1652.56 crore as revenue receipts (roughly supplies to non-MoD customers). These were also on cash basis, i.e., excluding pending bills of OFB for supplies already made. Some delay in clearing bills is normal and cyclical pending completion of pre-payment checks. In commercial accounting to be followed by corporatized OFB entities, the 7 companies would account for the value of unpaid actual supplies as part of turnover.

Therefore, profitability comparison between 2020-21 and 2021-22 would require appropriate caveats. Higher the higher levels of supplies made and billed, whether actually paid or not, results in higher turnover and higher corresponding profitability assuming the assured profit margin allowable to DPSUs. This may partly explain turnover pumping because of this transition from departmental to corporate accounting.

These new entities have also initiated various measures towards optimal utilisation of their resources and cost reduction. It has been reported that with focused attention on cost reduction, these companies have been able to make cumulative savings of about 9.48% in the areas like overtime and non-production activities during the initial six months itself.

This is a welcome sign. Now we must wait for the audited results to understand the key financial ratios and critically the Earnings Per Share(EPS) which would indicate, assuming a Price Earning Multiple of 25, the potential valuation of these companies. Cash Flow statements and the Balance sheet would also bring out the asset base and thus determine the Book Value of these companies which may be useful in planning the future disinvestment in these entities as has been done for other DPSUs and PSUs.


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