PSUs asked by govt to pay higher dividends have little room for more

Listed PSUs have paid dividend worth Rs 2.75 trn in last 5 yrs

The central government has asked public sector undertakings (PSUs) to fork out higher equity dividends and at more frequent intervals to compensate for the shortfall in other revenues. However, the balance sheets and profitability of listed PSUs suggest that they are running out of elbowroom.

In the past five years, leading listed PSUs such as Oil and Natural Gas Corporation, Indian Oil, NTPC, Power Grid Corporation, Coal India, and National Mineral Development Corporation, among others, have either maintained or increased their dividend pay-out despite a steady decline in their profitability and rising indebtedness due to the slowdown. (See charts)

In FY20, the 55 listed PSUs in Business Standard’s sample paid a total equity divided of around Rs 47,000 crore against their net profit of Rs 82,750 crore, translating to a pay-out ratio of 57 per cent, down from 70 per cent in the previous year, but way higher than the rest of India Inc.

The top listed firms on the Nifty50 index distributed around 45 per cent of their net profit as equity dividend in FY20 on average.

In the past five years, the 55 listed PSUs cumulatively paid equity dividend worth Rs 2.75 trillion, against their cumulative net profit of Rs 3.85 trillion, which translates to a record pay-out of 71.5 per cent. This was more than twice the pay-out ratio of Nifty50 firms, which was 32 per cent.

The amount the PSUs paid was separate from the sums they paid the government for share buy-backs. Between FY17 and FY20, PSUs cumulatively spent around Rs 41,000 crore on share buy-backs. This takes the total dividend pay-out ratio to around 82 per cent on average in the past five years.

The bulk of the dividend was paid-out by commodity producers and industrial companies such as ONGC, Coal India, NTPC, Power Grid, Bharat Heavy Electrical, Indian Oil and Bharat Petroleum Corporation (BPCL) among others.

These non-financial PSUs paid nearly Rs 42,000 crore combined as equity dividend accounting for 89 per cent of dividend pay-out by all listed government-owned companies.

In FY20, the dividend pay-out by these non-financial PSUs was down 22 per cent year-on-year (YoY), against a 40 per cent decline in their net profits.

A combination of poor profitability and higher dividend outgo led to a sharp rise in borrowings by these PSUs. 

These PSUs had a combined gross debt of Rs 8.74 trillion at the end of March 2020, against Rs 7.25 trillion a year ago, and Rs 4.3 trillion at the end of March 2015. Over the past five years, borrowings by PSUs have grown at a compound annual growth rate of 15.3 per cent against five per cent annualised growth in their net worth, seven per cent annualised growth in net sales, and a decline in their net profit.

Not surprisingly, their net debt to equity ratio more than doubled in the last five years to 0.87x at the end of March 2020, from 0.42x at end of March 2015.

Analysts say if PSUs are forced to pay more dividend they will be forced to borrow more. “I see a further deterioration in the financial ratio of PSUs if they are asked to pay more dividend. This could severely derail capex cycle of many of these companies,” says an analyst, speaking on the condition of anonymity.