Less PSU dividends in FY16?

Performance of many in first 9 months was muted; even with govt stipulation, payouts may not rise

Listed public sector undertakings (PSUs) have not only been key contributors to government revenues by way of dividends, but also, in many cases, yielded attractive dividend for investors. However, chances are that the trend might be different this time.

For the first in nine months (ended December 2015), the combined profit after tax (PAT) of 45 companies with a market capitalisation of Rs 10.73 lakh crore was up 10 per cent year-on-year, compared with 22 per cent decline in FY15. This seems an improvement but is distorted because of the three big oil marketing companies (OMCs). Excluding the trio of Bharat Petroleum, Hindustan Petroleum Corporation Ltd and Indian Oil Corporation, the combined profit of the 42 companies was down 18.4 per cent from a year before in the corresponding period, after falling 24 per cent in FY15.

The combined cash and bank balances have also been declining. From Rs 1.91 lakh crore at the end of FY14, it fell to Rs 1.73 lakh crore in FY15 and to Rs 1.67 lakh crore at the end of September 2015. This is not surprising, given the decline in their combined net profit and higher dividend payout ratio (as a percentage of net profit) though some of the money has also been invested in the business. The payout ratio increased from 44.5 per cent in FY14 to 46.5 per cent in FY15.

The financial performance for the first nine months of FY16 also tells a story. The noteworthy exceptions among large PSUs, apart from oil marketing companies (OMCs), are Power Grid, Bharat Electronics, National Buildings Construction Corporation and NHPC. The OMCs have benefited due to the sharp fall in oil prices and freeing of retail fuel prices. In contrast, the sector's producers such as Oil and Natural Gas Corporation and Oil India Ltd saw a sharp decline in profits in FY15; their earnings are also down in the first nine months of FY16.

With subdued energy prices, Coal India and NTPC have also seen only a single-digit rise in their nine months' profits, though better than the nine-12 per cent fall in FY15. Profits of GAIL, NMDC and Container Corporation have fallen about 40 per cent; Bharat Heavy Electricals and Steel Authority of India have reported huge losses. These are the PSUs that matter and can be trend changers.

While the first nine months' data indicate absolute dividend payment was up 47 per cent year-on-year, an accurate comparison will be available only after all PSUs declare their FY16 results and final dividends. As of now, it is largely boosted by the Rs 2,900-crore dividend declared by OMCs, compared with nil in FY15. The government policy requiring PSUs to pay 30 per cent of their annual profit as dividend would, however, influence the trend.

Dipen Shah, head of research at Kotak Securities, says, "Because of the dividend tax amendments applicable from FY17, several companies, including some PSUs, have come up with large dividends. Also, PSUs have to pay dividend at a stipulated rate. Because of this, dividends are higher, even as profits are not."

Other experts share this view. Ajay Bodke, a chief portfolio manager at Prabhudas Lilladher, says: "The government is insisting that PSUs with large cash either spend on capital expenditure or return it to shareholders. Also, dividend payouts have risen for FY16 due to the changes in dividend distribution tax in the (Union) Budget."

However, if their performance remains under pressure, then even if PSUs follow the 30 per cent rule, the absolute payout might not increase.

Bodke says: "Commodity prices fell sharply in the previous financial year. So, it is possible that FY16 dividends might be lower than FY15. But, fiscal pressure could push the government to impress on their boards to consider higher dividends from the cash surpluses. We will see how that pans out, once FY16 results are out."

In that case, it might hurt their financials in the long run, say experts.

That apart, there are question marks on the sustainability of the recent rebound in commodity prices (given a slowing Chinese economy) and anaemic domestic growth. In this backdrop, the ability of PSUs to deliver positively surprising performance - an essential ingredient to sustain higher dividends - will be put to test.