Weak finances could mean smaller dividends for government this fiscal
The government is doing its best to boost capital expenditure by front-loading spends — it has spent close to R1.5 lakh crore already. However, the weak financial performances of several public sector units (PSUs) may not just see capex being curtailed, the government is likely to receive smaller dividends from PSUs this time around.
While Indian Railways (IR) has seen it capex grow just 7% year-on-year to Rs 38,000 crore, in the seven months to October, several PSUs, which are strapped for cash, are pruning capex plans if not altogether abandoning them. A clutch of 10 companies, which reported a fall in profits in H1FY16, is expected to see a drop in annual profits of anywhere between 6% and 40%, Bloomberg analysts estimate. SAIL, which posted a loss of Rs 1,378 core in the six months to September, is set to report its first annual loss for the first time in 13 years. Capital goods player BHEL, which reported net loss of Rs 171 crore in H1FY16, is tipped to fare poorly in the second half too and hence, the estimated capex of a modest Rs 800 crore may not materialise.
The smaller surpluses could stymie expenditure on capacity expansion. A glance at the plans of the 10 PSUs shows they intend to spend around Rs 1 lakh crore this year which would be an increase of 13% over last year’s spends. Much of this is concentrated in four companies — ONGC, Coal India, NTPC and BPCL.
The others, especially SAIL and GAIL, face operational challenges and have been compelled to trim their capex by Rs 350-450 crore while IOC, although financially better off in the wake of falling crude oil prices, plans to spend just about Rs 10,500 crore, about 26% less than it did in FY15.
Analysts point out several heavyweight PSUs had embarked on a substantive spending cycle about five years back. The majority of this is complete and the remainder amounts to their outlay, over the next one to two years. The cash rich Coal India Limited — the miner boasts cash & equivalents of Rs 61,892 crore as of September — will continue to spend on railways and wagons.
As Bharat Iyer, MD & Head of India Equity Research, J P Morgan, points out, the onus of kick-starting the investment cycle is on the government given private sector leverage is at a 15-year high and the uncertain international environment will inhibit companies from spending early in the cycle. The government has so far focussed on roads, railways and defence; while the government may spend more this year, it must be remembered that the total amount spent on capital formation in FY15 was relatively low at Rs 1.87 lakh crore.
Also, as Iyer observes, the larger spenders among PSUs have typically been the resources companies. “Given the decline in global commodity prices and the resultant impact on cash flows it is difficult to see these companies investing aggressively at this stage in the business cycle,” Iyer said. Revival in private capex could be at least a year away say analysts. Bank of America Merrill Lynch recently pushed back its capex recovery timeline to 2017 from 2016 citing high real lending rates, low capacity utilisation and a weak global investment cycle.
Meanwhile, the government could end up with a smaller dividend income in FY16. Already, dividends paid out by Coal India, NTPC, GAIL, IOCL and BHEL in FY15 were smaller than those in the previous year. For the sample as a whole, dividends were smaller by Rs 8,925 crore or a fifth of the quantum paid in FY14.
Rakesh Arora, MD & Head of Research at Macquarie Capital, says the weak operational performance of companies like SAIL and NMDC may lead to lower dividend payouts this year. The oil marketing companies, however, should maintain dividend payouts, Arora believes.
In the last five years, SAIL and NMDC in which the government currently holds 75% and 80%, respectively, have distributed an average dividend of Rs 861 crore and Rs 2,525 crore respectively.
Efforts by companies in the private sector to de-leverage through the sale of assets aren’t yielding the desired results; even for those firms that are financially better off, surplus capacity of 20-25% across sectors means there’s no compulsion to invest immediately. An analysis by Credit Suisse reveals the financial stress on ten of the most highly indebted groups intensified in FY15 with the debt to EBITDA ratio at 7 and the interest cover as low as 0.8.