The need to cut deficits and a lack of revenue buoyancy have pushed the central govt. to rely more on disinvestments of/dividends from PSUs, which increased from 4.3% of the govt’s net revenues in FY13 to 8.3% in FY17. Nearly 30% of non-bank listed PSUs have meaningfully increased pay-outs in FY17; several have already paid out large portions of their cash balances. Yet, the government hopes to make 8.8% of FY18 net revenue from its PSU holdings. This is a tough Bill to fill, but it may become ever more critical if the GST impacts core tax collections near term. The government may be forced to consider more radical means of extracting cash from its companies. Government creativity might produce some short-term beneficiaries — but in general it would be bad for PSU balance sheet/PnL. Top down, this would be a basket best avoided over the next 12 months.
Cash return increasing much faster than income
Ebitda for the non-financial PSUs increased 8% between FY13 and FY17. The govt’s income from this set (dividends only) increased 5.8x. Despite some disposal of equity, the market cap of the government’s non-financial listed holdings increased 20% between Apr ’13 and Apr ’17 (almost 70% of the net increase is attributable to the three OMCs). The divestment target for FY18 (`725 bn) is almost 3x FY13 actuals. The govt’s equity portfolio is commodity heavy: about 70% of net Ebitda can be attributed to cyclicals/resources. Consensus forecasts Ebitda for this set at 16% higher y-o-y in FY18 — which drives hopes of sustained, high dividends. If cyclicals were to weaken, disbursements could be lower.
FY18 Budget: a stiff target
The central Govt.’s FY18 PSU income target of `1,400 bn can partly be met by continued high dividend pay-outs, strategic sales and new listings. If consensus forecasts for PSU Ebitda increases are correct, then the companies can maintain high payments next year with only a moderate increase in gearing. Without further large divestments though, the government is likely to fall meaningfully short of its budgeted targets. If history is a guide, there is limited appetite for government stock sales.
The Government needs these revenues nonetheless
The central govt is likely to feel increasing stress to generate cash from its PSU holdings in FY18. Very few PSUs now have surplus cash. The govt is already examining cross holdings. In addition, options to encourage asset sales by PSU companies with subsequent, one time pay-outs of the receipts are reportedly being considered. While minorities can benefit from one-time cash returns, such financial innovation is unlikely to support long-term returns for the PSU basket while meaningfully increasing leverage.
Govt can potentially raise nearly `567 bn as dividends in FY18
We arrive at the dividend paying capacity of each company by taking the maximum of dividend based on 30% payout ratio and dividend based on the FY17 payout ratio. In case the above number is higher than the PAT for FY18, we restrict the dividend payment to PAT so that leverage is not adversely impacted. Based on this, the government’s share of dividends could be `567 bn.