8/10/2019 India Inc's Growing Disconnect Between Profits and Dividends _ Business Standard News

http://slidepdf.com/reader/full/india-incs-growing-disconnect-between-profits-and-dividends-business 1/3

India Inc's growing disconnect between profitsand dividendsSome big companies such as Infosys hoard cash and others borrow to keep up payments toshareholders

Krishna Kant & Abhineet Kumar | Mumbai

Related News

If Information technology (IT) major Infosys been more generous indistributing its surplus cash over the years to its shareholders, would its

promoters have had less incentive to sell their holdings to raise cash tofund their post-retirement pursuit?

Two days e arlier, fo ur of the founders sold around 18 million shares

collectively, leading to a sharp fall in its share price. The founderstogether raised around Rs 6,500 crore from their sales.

Infosys had cash & equivalent worth Rs 28,144 crore at the end of March, 62.6 per cent of the company’sassets at the end of that financial year, the highest among the top five IT majors. Had Infosys distributedthe cash pile through special dividends, the promoters would have had more cash to play with. In the fiveyears ending March, Infosys distributed nearly a third of its net profit as equity dividend. Thecorresponding ratio for Tata Consultancy Services was 40 per cent and would rise further if its payout inthe first quarter of the current financial year was taken into account. The company has distributed nearlyall of its profits in the first half as a mix of regular and special dividend.

Elsewhere in India Inc, the link between profits and dividend payout has weakened in recent years. In the past five years, the dividend payout by BSE 200 companies, excluding bank & financial ones, grew at acompounded annual rate (CAGR) of 20.5 per cent, much faste r than the 12.1 per cent compoundedgrowth in net profit.

This disconnect between profits a nd dividends could have prompted the Securities and Exchange Boardof India to propose a dividend policy for listed companies. Having one should discourage both cashhoarders and those which borrow to maintain a payout ratio.

Companies in general stepped-up their payout ratio (proportion of current year net profit distributed asequity dividend) in response to a decline in growth and profitability. In FY14, companies paid out abouta third of their net profit (34.2 per cent) as dividends against 23.8 per cent in FY09 and 22.7 per cent inFY11. During the same period, return on equity for the sample declined to 13.8 per cent in FY14 from15.7 per cent in FY09 and a high of 17.8 per cent in FY11 (see chart).

Companies in cash-rich sectors such as consumer goods, IT services and pharmaceuticals have beenaccumulating cash. Those struggling with slow growth and poor profitability such as construction &infrastructure, capital goods and power companies have stepped up pay out to maintain some parity with

past dividends.

8/10/2019 India Inc's Growing Disconnect Between Profits and Dividends _ Business Standard News

http://slidepdf.com/reader/full/india-incs-growing-disconnect-between-profits-and-dividends-business 2/3

In all, 158 non-bank & financialscompanies cumulatively distributed Rs 101,767 crore as equity dividend in 2013-14, up by 24 per cent,much faster than the 9.4 per cent year-on-year growth in net profit. The mis-match was highlighted byIndia Ratings, local arm of Fitch Ratings. It suggested 57 companies borrowed as much as $3.5 billion(Rs 21,000 crore) in 2012-13 to pay dividends. The report did not name the companies. As Infosyssuggests, the reverse is also true. Some of India’s most cash-rich and profitable companies areaccumulating cash at a faster clip. For 18 out of 158 non-financial BSE 200 companies, cash &equivalents on their books accounted for more than half of their assets. Seven companies reported a cashto asset ratio of 75 per cent or higher in 2013-14.

“The difference in companies’ dividend payout strategy is natural, as they operate in differentenvironments,” says Amit Tandon, co-founder of proxy advisory firm Institutional Investor AdvisoryServices. “This is why we believe that companies should be upfront about their strategy, as shareholdersneed to know this.”

For the entire sample, cash represented 14.5 per cent of a company’s assets on average at the end of FY14.

At the end of March this year, the companies in our sample were sitting on cash & equivalents worth Rs6.6 lakh crore or $107 billion. The cash pile was up 17 per cent in FY14 over the previous year and hasexpanded at a CAGR of 13.4 per cent, beating net profit growth of 12.1 per cent during the period.

8/10/2019 India Inc's Growing Disconnect Between Profits and Dividends _ Business Standard News

http://slidepdf.com/reader/full/india-incs-growing-disconnect-between-profits-and-dividends-business 3/3