THEY are unlikely to come up in discussions about India Inc. Nor is the media or the analyst community constantly hounding their CEOs. But given the influence they have and the space they occupy within India Inc's landscape, it would be foolhardy to ignore them. If you have not yet figured it out, here goes… we're referring to those companies which bear the moniker of PSUs (public sector undertakings).

The truth about government-owned companies or PSUs, as they are better known, is that they deserve a far bigger space than they are currently accorded in India Inc.

By and large, popular belief is that Corporate India is all about private enterprise. The fact, though, is that PSUs account for as much as 43% of the combined net sales of all ET500 companies, even though the total number of PSUs in this list is only 59. This is a clear indication that not only are PSUs a big part of India Inc, but also that most of these companies are veritable giants - so much so that a typical PSU is almost three times bigger (in terms of net sales) than its private sector counterpart.

Such is their dominance that seven out of the top 10 companies and 33 among the top 100 companies in India are government-owned.

The leader of the pack is IndianOil (IOC), which alone accounts for 10% of the combined turnover of all ET500 companies.

Even more PSUs may end up on the list next year as some of the biggest government-owned companies like Central Bank, Power Grid Corp, Air India + Indian Airlines and Coal India have either recently got listed or are likely to make it to the bourses soon.

And we are not even talking about government-owned insurance companies, the biggest of which - Life Insurance Corporation (LIC) - will probably get a direct entry into the top three if it goes in for a listing.

One of the major reasons for PSUs not getting their fair share of the limelight is the perception that by and large, government companies exist thanks to their monopolistic status in some industries and government subsidies in others.

Moreover, for years, such companies were considered the ultimate symbols of inefficiency. Perhaps, it is now time to stop all those PSU jokes and correct this misperception. The reality is that it would be inappropriate to label PSUs as financially inefficient or less profitable than their private sector counterparts.

Government-owned enterprises account for 37% of the combined net profit of all ET500 companies, which is less than their share in turnover. However, this is largely due to lower profitability of oil marketing companies such as IOC, Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) - their margins are under pressure due to the government's cap on retail fuel prices, which is beyond the companies' control.

On a like-to-like basis, government companies such as National Aluminium (Nalco), National Thermal Power Corporation (NTPC), Steel Authority (SAIL), Gas Authority of India (Gail), Bharat Heavy Electricals (Bhel), State Bank of India (SBI), Shipping Corporation of India (SCI) and National Fertilisers have the same levels of profitability as their private sector peers.

Even oil companies have consistently been seen as extremely efficient, adhering to the best practices in their respective industry.

Critics may argue that more than profitability, it is growth that we should be looking at. Are government companies as adept in taking advantage of growth opportunities as their private sector counterparts? Here's how the numbers stack up...

Last year, the turnover of PSUs was up by 25% - than the 32% combined growth shown by ET500 companies. Profit growth for PSUs was also lower at 31%, compared to 43% growth recorded by the entire sample. This may indicate that PSUs are sluggish in spotting opportunities.

However, this can partly be attributed to the nature of their business and slower decision-making with regard to major investment plans (these have to be cleared by the concerned ministry or bureaucrats).

Moreover, PSUs have a limited presence in high-growth businesses such as IT, construction, real estate and telecom services.

Additionally, oil companies are taking a hit on account of government policy on pricing, which has dampened profits further.

While size may be attractive when it comes to the private sector, the stock market does not show a similar faith in PSUs.

On an average, ET500 companies are valued at around 19 times their trailing net profits, but PSUs are valued at only 12.4 times their earnings. That's a 50% discount to their private sector peers. This can only be attributed to two factors - political risks and uncertainties related to government ownership; and the cyclical nature of their businesses.

Most of the PSUs are either in commodity or cyclical businesses - oil & gas, metals and banking, which generally get lower valuations than their peers in general manufacturing, consumer products, IT & services, capital goods and construction.

The present is definitely robust, but as every good analyst knows, the only relevant question when looking at corporates is: 'What is the future (of PSUs)?' Will they be able to survive the onslaught of domestic and foreign competition?

Most PSUs were set up at a time when the private sector was small and not in a position to fork out huge sums to invest in capital-intensive businesses such as metals, oil & gas, power generation, telecom and other infrastructure industries.

Moreover, the government restricted competition and many of them became monopoly players in their industries. This resulted in many PSUs becoming large insular players, which made them vulnerable to competition in the post-liberalisation phase.

Their vulnerability is most visible in the services sector - telecom and banking - where speed of decision-making and operational flexibility matter the most.

Not surprisingly, PSUs have lagged behind their private sector counterparts in both these sectors. But in sectors where operational flexibility is not so important such as commodities and oil & gas, PSUs continue to dominate.

However, all PSUs are not similar and some of them - NTPC, Engineers India, Bhel and Bharat Electronics - continue to flourish despite competition.

Going forward, the operational environment for PSUs will only improve as they get listed on the stock exchanges. Public shareholding and the necessity to make their finances public may force the management to pull up their socks.

It may also make the PSUs' promoters, i.e. the government, more market-friendly and sensitive to shareholders' interest. Anyway, with each passing year, the boards of directors of PSUs are being vested with greater decision-making power. Though PSUs may lose some degree of dominance as they are stripped of their monopoly status and new players emerge, they are definitely here to stay.

And who knows, in due course, most large PSUs may transform into truly public-owned companies (aka independent companies) as the government progressively reduces it stake to less than 50%. It just requires a change in the political climate or government policy.

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