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Aabhas Pandya
Mumbai, July 2: The Unit Trust of India (UTI) has declared a tax-free dividend of Rs 1.35 (13.5 per cent) for Unit Scheme-64 for 1998-99. This works out to a yield of 9.64 per cent on last year's July sale price of Rs 14. Last year, the trust had paid Rs 2 per unit pre-tax, which works out to a post-tax yield of around 13.5 per cent at this year's top personal tax rate of 33 per cent.
For non-taxpayers, however, this year's dividend of Rs 1.35 works out to a sharp drop in income yields. Thanks to this conservative dividend policy, and the Rs 3,300 crore government bailout through the special unit scheme, the US-64 has turned around by converting last year's negative reserves position of Rs 1,098 crore into a surplus this year.
For July 1999, the Trust has announced a lower sale price of Rs 13.50 and a commensurate repurchase price of Rs 13.20 in the hope that the massive outflows of last year will not recur. Last year, US-64 saw outflows in excess of Rs 7,500 crore, against inflows of just Rs 4,596 crore.Most of those outflows last year were the result of corporates panicking at the prospect of UTI not being able to maintain its repurchase prices in the wake of the deficit in its reserves.
This year, thanks to the lowering of dividend, the trend could well be different. Though the 13.5 per cent tax-free dividend translates into an attractive avenue for corporates, for retail investors outside the tax bracket it means a sharp fall in income compared to the 20 per cent dividend last year.
According to UTI chairman PS Subramanyam, the payout is based on the recommendations of the Deepak Parekh Committee report, which recommended a conservative dividend policy and is in line with the current market scenario.
``Though the scheme generated enough income to pay a dividend of around 16.2 per cent we preferred to adopt a prudential policy insofar as distribution is concerned,'' said the UTI chairman. UTI generated an income of Rs 2,200 crore while the 13.5 per cent distribution would mean a pay out of Rs 1,800crore.
The 20 per cent dividend in 1997-98 gave a yield of 14.28 per cent (pre-tax) to investors who would have invested at Rs 14 in the previous year. The current dividend gives a yield of only 9.64 per cent to these investors. However, the tax-free dividend gives a slightly better yield to unitholders in the top-tax bracket, who would now earn 9.64 per cent against 9.28 per cent in the previous year.
As on June 30, 1999, the unit capital of US-64 was Rs 13,676.80 crore while the corpus was Rs 16,100 crore. This gives a net asset value of over Rs 11.77 per unit, which has risen by over 24 per cent from last year's level of Rs 9.47. Based on the current NAV, the post-dividend NAV will be above par at Rs 10.42. Thanks to the sustained rally in cyclical counters in the last two months, the reserves of the scheme have turned positive by a few crores.
The US-64 earned around 65 per cent (Rs 1,470 crore) of its income during 1998-99 from profit on sale of investments while the rest has come from dividendsand interest. Around 65 per cent of the portfolio is invested in equities and the rest is in debt instruments.
US-64 had earned a mere Rs 400 crore from profit on sale of investments till December 31, 1998, which gives a fair indication of how good the current rally has been for US-64. Between December 31, 1998, and June 30, 1999, the scheme has earned profits in excess of Rs 1,050 crore.
At this year's July prices, if all investors were to redeem at the repurchase price of Rs 13.20, UTI will face a shortfall of Rs 1,850 crore, down from last year's gap of Rs 6,064 crore.
Although the cut in dividend has reopened fears of some redemption pressure, UTI officials point out that it was the best return they could give in the current circumstances. ``13.5 per cent is the best we could do. There may be some redemption pressure but the absence of any competitive investment avenues is likely to prevent investors from exiting the fund,'' said a UTI official. For an investor who entered last year at Rs 14 andexits at Rs 13.20 after earning the dividend, the net return will only be 55 paise, or a yield of 3.92 per cent. In July, 1998, UTI had seen an inflow of over Rs 4,000 crore. ``These investors may not exit immediately since the repurchase price is so low but as and when the repurchase price reaches a comfortable level, they will lodge units for repurchase,'' said an analyst.
Analysts, however, say that UTI has done the right thing by cutting dividend, though it may create some problems in the short term. ``While the dividend is realistic, any redemptions will also be a blessing in disguise since it will help UTI manage assets under US-64 in a better manner,'' said a market participant.
The yield in US-64 is now lower than the last monthly income plan of UTI where it assured a monthly income of 10.75 per cent (11.23 per cent, annualised). However, UTI officials state that MIPs will not attract the moolah at the cost of US-64. ``One, the coupon of 10.75 per cent is not sustainable now and will be lower.Two, returns will be assured for only one year and the redemption of MIPs will be at NAV. Hence, there will be no capital protection,'' pointed out a UTI official. Assuming UTI maintains dividend at 13.5 per cent next year, on this July's sale price, the yield works out to a healthy tax-free return of 10 per cent.
Insight:
Good for long term
Even though the dividend has been reduced, the move to cut dividend and lower the repurchase price is ultimately in the best interest of UTI's investors. That is because with the repurchase price moving closer to the NAV, the scheme has been put on a sounder footing. The direction in US-64 is clear: it will eventually align the repurchase price with the NAV and the dividend with its earnings.
However, UTI resorted to a policy of hiking sale prices last year (to keep it in alignment with repurchase price) and to keep up investor confidence. New entrants into the scheme at these prices have, therefore, lost out, because, going by the increasingrepurchase price, the perception was that dividend would be kept fairly high.
Aaron Chaze
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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