PSUs cut dividend 2nd time in a decade as cash reserves continue to dwindle

The combined dividend pay-out by state-owned firms, excluding banks, down 9.3% in 2017-18; Combined cash reserves at all-time

The combined dividend payout by  public sector undertakings (PSUs), excluding banks and financials, declined nearly 10 per cent in 2017-18. This was the first time since 2014-15 — and only the second instance in a decade — when the dividend kitty shrank over the previous fiscal year. 

The cut in equity dividends paid by PSUs was despite the improvement in their profitability, especially for oil companies and metal producers. The combined net profit of listed non-financial PSUs was up 9.5 per cent in 2017-18 (FY18) to Rs 1.2 trillion, two-thirds of which was accounted for by oil and gas companies. 

The dividend crunch at public sector banks (PSBs) was starker. The government dividend income from PSBs hit a record low in FY18, with payouts from only two mid-size banks — Indian Bank and Vijaya Bank. 

All other PSBs, including major banks such as State Bank of India, Bank of Baroda and Punjab National Bank, skipped dividend amid mounting losses because of piling up of bad debt. In comparison, five PSBs had declared dividends in 2016-17 (FY17). In 2014-15 (FY15), 20 out of 22 listed PSBs had declared dividends. The dividend payment by PSBs has declined from Rs 70 billion in FY15 to just Rs 4.4 billion last fiscal year — a tiny fraction of their current market capitalisation. 

Last month, Steel Authority of India (SAIL) declined the government’s request to pay equity dividend, citing weak profitability and capital expenditure (capex) plans.

Analysts believe more PSUs could go slow on dividend payout due to their growing mismatch between internal accruals (profits left after dividend payment) and capex (capital expenditure) requirement. For instance, incremental capex for non-oil PSUs exceeded internal accruals for the sixth consecutive year in FY18. This forced them to dip into their cash reserves or raise fresh loans. 

“There is little elbow room for PSUs to raise dividends any further. Most of the large PSUs such as NMDC, Oil and Natural Gas Corporation (ONGC), Hindustan Aeronautics and NTPC have exhausted their accumulated cash reserves through special dividends in the past. A handful of mid-sized PSUs such as Cochin Shipyard, Manganese Ore India and NBCC are sitting on surplus cash, but they are not large enough to move the government coffers at the macro level,” said G Chokkalingam, founder and managing director, Equinomics Research and Advisory Services. 

According to Chokkalingam, Coal India (CIL) is now the only large PSUs sitting on significant amount of cash reserves. The coal miner reported cash and bank balances worth Rs 314.8 billion at the end of March this year, little different from the figure a year ago, but down 50 per cent from a record high of Rs 622 billion at the end of March 2013. 

At the aggregate level, the combined cash reserves for PSUs fell 14 per cent in FY18 to Rs 1.03 trillion, the lowest in almost a decade. 

A mix of poor profitability and high dividend payout ratio in the last few years has eaten into the cash reserves.

Analysts also doubt the sustainability of the recent improvement in the profitability of PSUs. 

“While crude oil prices climb in the international in market, oil sector PSUs will have to share the subsidy burden on fuel as they did in the past, leading to deterioration in their profitability,” said Dhananjay Sinha, head research, Emkay Global Financial Services. 

Oil PSUs such as Indian Oil Corporation, ONGC, GAIL (India), and Bharat Petroleum Corporation have accounted for the entire growth in PSUs' combined net profits from the lows of FY15. In comparison, the combined net profits of non-oil PSUs such as NTPC, Power Grid Corporation, CIL, Bharat Heavy Electricals and NMDC, among others, is yet to scale the previous highs, even though have seen improvements recently. 

Analysts say the government’s unconventional move to raise cash from PSUs has not helped either. 

The HPCL deal, for example, has exhausted ONGC's cash reserves and forced it to make fresh borrowings hitting its bottom line. NTPC, too, will face the same fate it is asked to fork out cash to acquire government stake in NHPC, said Chokkalingam.