Growth by means of acquisitions has not been synonymous with expansion strategies for Indian state-run companies for as long as most of us can remember especially within the context of acquiring business assets overseas.  Traditionally when people discuss state-run businesses over a cup of masala – chai over at the corner tea stall topics would revolve around bureaucracy, slow growth, over-regulation and the likes.  However, that seems to be changing very quickly and the latest buzz around the tea stalls are optimistic and all about billion dollar acquisition opportunities for state-run companies.

A recent article in Bloomberg’s Business Week stated:

Oil & Natural Gas Corp., India’s biggest explorer, and Indian Oil Corp. are set to get approval from the government to spend five times more on acquisitions, giving them greater freedom to compete with China for assets.

NTPC Ltd. and Steel Authority of India Ltd. are also expected to be permitted to make 50-billion-rupee ($1.1 billion) takeovers without government clearance, Bhaskar Chatterjee, secretary in the Department of Public Enterprises said in an interview. The state-run companies, which can now invest 10 billion rupees, may get the higher limit in three weeks, he said.

Indian companies are competing with Chinese competitors for energy assets to meet demand in the world’s two most populous nations. State-run Chinese companies spent a record $32 billion last year acquiring resources overseas while a $2.1 billion purchase by ONGC was the sole energy investment by India.

Acquisitions by India’s state run companies may be small as compared to the Chinese companies but it’s a good start and a move that could pave the way for more such companies to explore acquisitions.  In many ways, it signifies the governments will to relax the stringent controls which once restricted such acquisitions and promote such investments in overseas businesses.  These first few steps towards encouraging Public Sector Units or PSUs as they are commonly known could lead to spillover effect that could see some positive outcomes.  We expect to see:

• Further corporatization of PSUs breaking away from the older inefficient practices making them an attractive investment target for casual as well as serious investors
• Unlocking of value at PSU’s as the large cash reserves which have traditionally not been utilized to their potential will now be allocated towards acquiring assets and building wealth
• Resources being deployed for strategic asset allocations across technology, process improvements and global assets
• A continuing trend of acquisitions by PSU’s as others follow suit and utilize their capital better giving investors more confidence in State-run companies and changing perceptions

These oil companies may have just set the ball rolling for a large change in the public sector business operations in India.  How soon it gathers momentum and how this will translate to the larger number of second tier PSU’s only time will tell.  For now, the talk around state-run companies seems positive.