Restructuring State-owned Enterprises of a State Government of India: Problems, Prospects, and Lessons Learnt

The problem starts with the poor working capital position, leading to high raw material cost and uncompetitive final product pricing. This leads to the generation of a very low investible surplus. Not having investible surplus has forced the state-owned manufacturing companies to a financial situation where they are facing severe dearth of capital. The age-old plant and machineries coupled with outdated technology used for production face severe problem under the dearth of capital condition and the manufacturing units become incapable of generating sufficient investible surplus. Lack of modernization of machinery and upgradation of people skills lead to constraints in producing value-added product which have both market demand as well as the potential for greater contribution than the regular product. Therefore, the manufacturing companies continue to perform poorly, without any product-mix diversification. The poor operational performance also gets reflected in their financial performance. Despite having positive contribution at operating margin before direct labour, most of the state-owned manufacturing companies are incurring losses at Earning Before Interest, Tax, Depreciation and Amortisation (EBITDA) level, even under the best-case scenario, mainly because of huge amount of employee cost.