India Inc turns stingy on payout; cos giving dividends declines 4.5%

NEW DELHI: Earnings growth has returned for India Inc after a brief spell of slowdown in 2008, but companies have not yet warmed up to sharing it fully with their shareholders with the number of firms doling out dividends declining in the first half of the fiscal.

Dividend is the money that companies pay to equity holders based on the number of shares owned by them, periodically out of the profits. Most companies pay annual dividends in the first half of the year, but some also pay interim dividends if they have surplus cash for which they don’t have any immediate use. Some say companies are acting stingy as they want to conserve cash for investments.

With all projections indicating an 8.5-9% growth in the economy this year, companies are gearing up to take advantage of the Indian consumption story with significant capacity expansions in the pipeline, said Ajay Arora, partner (Transaction Advisory Services) at consulting firm Ernst & Young.

“After the global financial slowdown, companies were going slow on investments but now a lot of them are saving capital to go in for the next round of investment,” he said.

The numbers tell a part of the story. The total number of firms declaring dividends for the first half of this fiscal year ending September 30, has dropped 4.5% over the year-ago period. Companies announce dividend payment in advance and for the first half 1,144 firms out of the total space of over 3,000 listed companies, have declared dividend payouts.

This is also the second successive year where the number of firms doling out dividend to shareholders has declined in the first half of a financial year. The peak was recorded in the April-September 2008 when 1,363 firms paid dividends.
Among the BSE 100 companies, the prominent firms who have decided to skip dividends, include, or are yet to announce, names like Tata Communications and Ranbaxy Labs.

But at the same time, many firms paid dividends more than once in the first six months of the fiscal. These include names like Hero Honda, Colgate Palmolive, Crisil, Godrej Consumer, TCS, Patni Computer, Aventis Pharma, Gateway Distriparks and Hexaware Technologies.

While on the one hand, companies appear to be cautious on the state of the global economy, corporate disclosures over the past 6-12 months indicate firms, especially those in the manufacturing sector, are in the process of initiating the next capacity expansion cycle.

A raft of companies across industries such as cement, paper, tyre, paints, automobiles and consumer durables have over the past one year announced capacity expansion plans that will be executed over the next 2-5 years. While some of these include companies reviving expansion projects that were put in the freezer during the slowdown, many others are investing to keep pace with domestic demand.

For instance, as much as $30-billion investments are estimated to be in the pipeline by automakers in the next four years to meet the demand in the world’s second fastest-growing market after China. The country’s largest carmaker, Maruti Suzuki, is in the process of setting up its fifth plant and has already started working out plans for its sixth production facility. Not to be left behind, the auto component industry association, ACMA, said on Friday that local part makers are estimated to invest $35 billion by 2020.

Among others, cement is another industry where companies are looking at big investments. Even as the industry has seen production capacity increase by as much as 50% in the past three years, firms have lined up future investments of more than `25,000 crore. Half of this will be made by the top two players, Holcim and Ultratech.

Experts say another reason for conserving cash is inflation that has put an upward pressure on the cost of borrowing. “The increasing cost of borrowing, coupled with global uncertainties, is translating into higher retention of internal accruals by Indian corporates to fund their expansion plans,” said DR Dogra, MD & CEO at rating agency Credit Analysis & Research.