Budget 2017: Jaitley may have to account for lower dividends from PSUs

Cash reserves down 34% since March 2014 after they stepped up payouts

As Finance Minister Arun Jaitley rises to present the 2017-18 Budget later this week, he might need to temper his expectations of dividend income from central public sector undertakings (PSUs) in the next financial year. 

The government’s aim to achieve its revenue target has put pressure on PSUs to increase their dividend, which has led to a steady depletion of their cash reserves in the past three years. 

Analysts expect central PSUs to now go slow on dividend pay-out, in the current and next financial years, to conserve cash to funding their growth. 

In the past, top dividend-paying PSUs such as Coal India, NMDC and Oil and Natural Gas Corporation (ONGC) kept dipping into their accumulated profits. 

“In the recent past, PSUs have repeatedly helped their owner-promoter (the government) with higher special dividends and share buybacks. This window is closing because of a combination of their declining cash reserves and poor profitability,” said G Chokkalingam, founder and chief executive officer, Equinomics Research & Advisory.

The analysis is based on the financial data of non-financial central public sector undertakings that are part of BSE 500 index. 

The combined cash and bank balances of 32 non-bank and non-financial PSUs were down 20 per cent during the first half of FY17 over FY16.

Dividend payout went up 21 per cent in FY16 despite a 4 per cent year-on-year decline in their combined net profit.

In all, PSUs’ cash reserves were down 34 per cent during the first 30 months of the present government.

The combined cash and bank balances of 32 non-financial central PSUs in our sample declined to Rs 1.26 lakh crore at the end of September, 2016, against Rs 1.59 lakh crore at the end of FY16 (March 31). At their peak, the companies in our sample were sitting on cash and bank balances of Rs 1.95 lakh crore, at the end of FY12.

 

Last financial year, PSUs in the Business Standard sample paid a record 58.3 per cent of their current profits as dividends. The corresponding ratio was 33.3 per cent for non-government-owned companies in the BSE 500 index. In comparison, the 10-year average payout ratio for public sector companies is around 37 per cent.

If government-owned banks and non-banking finance companies were included, the payout ratio for central PSUs was 70 per cent. In other words, a typical central government company distributed 70 per cent of net profit in FY16 as dividend, leaving little surplus for growth and capital expansion.

As a result, the sample’s combined retained profit was down 25 per cent in FY16 over FY15 and it had nearly halved from the highs of FY11. After paying for equity dividend, PSUs retained around Rs 33,000 crore of net profit against Rs 44,100 crore in FY15 and Rs 62,500 crore in FY11. Experts said this had implications for the companies’ investment plans. For example, Coal India — the top dividend payer in FY16 — had a payout ratio of 121 per cent in the past financial year. In other words, its equity dividend exceeded its net profit by 21 per cent in 2015-16, leading to nearly 25 per cent year-on-year (y-o-y) fall in cash reserves. 

NMDC, another big cash cow, made a dividend payout, which exceeded its net profit by 49 per cent. 

ONGC distributed 52 per cent of its FY16 net profits as dividend, unusually high for a company in a capital-intensive sector.

Data also suggest the government’s dash for cash has begun to hurt PSUs’ growth plans and their balance sheets. The combined capital expenditure, including projects in progress was up only 4.7 per cent and 1.1 per cent y-o-y in FY16 and FY15, respectively, the slowest pace in nearly a decade. In comparison, their capital expenditure grew at an average annualised rate of 14.7 per cent between FY06 and FY14. This could be traced to their declining retained profits.

Companies have also reported a rise in their indebtedness, with gross debt to equity for the sample rising 30 basis points to 0.73 times in FY16, from 0.7 times in the previous year.  

Some analysts are now raising red flags. “Higher capital expenditure by the public sector is crucial for investment revival in the country. This won’t happen if cash-rich PSUs are forced to distribute a rising share of their profits or cash reserves as dividend,” said one.