IndiaInc'sgrowingdisconnectbetweenprofits

anddividends
SomebigcompaniessuchasInfosyshoardcashandothersborrowtokeepuppaymentsto
shareholders
KrishnaKant&AbhineetKumar|Mumbai
RelatedNews
IfInformationtechnology(IT)majorInfosysbeenmoregenerousin
distributingitssurpluscashovertheyearstoitsshareholders,wouldits
promotershavehadlessincentivetoselltheirholdingstoraisecashto
fundtheirpostretirementpursuit?
Twodaysearlier,fourofthefounderssoldaround18millionshares
collectively,leadingtoasharpfallinitsshareprice.Thefounders
togetherraisedaroundRs6,500crorefromtheirsales.
Infosyshadcash&equivalentworthRs28,144croreattheendofMarch,62.6percentofthecompanys
assetsattheendofthatfinancialyear,thehighestamongthetopfiveITmajors.HadInfosysdistributed
thecashpilethroughspecialdividends,thepromoterswouldhavehadmorecashtoplaywith.Inthefive
yearsendingMarch,Infosysdistributednearlyathirdofitsnetprofitasequitydividend.The
correspondingratioforTataConsultancyServiceswas40percentandwouldrisefurtherifitspayoutin
thefirstquarterofthecurrentfinancialyearwastakenintoaccount.Thecompanyhasdistributednearly
allofitsprofitsinthefirsthalfasamixofregularandspecialdividend.
ElsewhereinIndiaInc,thelinkbetweenprofitsanddividendpayouthasweakenedinrecentyears.Inthe
pastfiveyears,thedividendpayoutbyBSE200companies,excludingbank&financialones,grewata
compoundedannualrate(CAGR)of20.5percent,muchfasterthanthe12.1percentcompounded
growthinnetprofit.
ThisdisconnectbetweenprofitsanddividendscouldhavepromptedtheSecuritiesandExchangeBoard
ofIndiatoproposeadividendpolicyforlistedcompanies.Havingoneshoulddiscouragebothcash
hoardersandthosewhichborrowtomaintainapayoutratio.
Companiesingeneralsteppeduptheirpayoutratio(proportionofcurrentyearnetprofitdistributedas
equitydividend)inresponsetoadeclineingrowthandprofitability.InFY14,companiespaidoutabout
athirdoftheirnetprofit(34.2percent)asdividendsagainst23.8percentinFY09and22.7percentin
FY11.Duringthesameperiod,returnonequityforthesampledeclinedto13.8percentinFY14from
15.7percentinFY09andahighof17.8percentinFY11(seechart).

Companiesincashrichsectorssuchasconsumergoods,ITservicesandpharmaceuticalshavebeen
accumulatingcash.Thosestrugglingwithslowgrowthandpoorprofitabilitysuchasconstruction&
infrastructure,capitalgoodsandpowercompanieshavesteppeduppayouttomaintainsomeparitywith
pastdividends.

Inall,158nonbank&financials
companiescumulativelydistributedRs101,767croreasequitydividendin201314,upby24percent,
muchfasterthanthe9.4percentyearonyeargrowthinnetprofit.Themismatchwashighlightedby
IndiaRatings,localarmofFitchRatings.Itsuggested57companiesborrowedasmuchas$3.5billion
(Rs21,000crore)in201213topaydividends.Thereportdidnotnamethecompanies.AsInfosys
suggests,thereverseisalsotrue.SomeofIndiasmostcashrichandprofitablecompaniesare
accumulatingcashatafasterclip.For18outof158nonfinancialBSE200companies,cash&
equivalentsontheirbooksaccountedformorethanhalfoftheirassets.Sevencompaniesreportedacash
toassetratioof75percentorhigherin201314.
Thedifferenceincompaniesdividendpayoutstrategyisnatural,astheyoperateindifferent
environments,saysAmitTandon,cofounderofproxyadvisoryfirmInstitutionalInvestorAdvisory
Services.Thisiswhywebelievethatcompaniesshouldbeupfrontabouttheirstrategy,asshareholders
needtoknowthis.
Fortheentiresample,cashrepresented14.5percentofacompanysassetsonaverageattheendof
FY14.
AttheendofMarchthisyear,thecompaniesinoursampleweresittingoncash&equivalentsworthRs
6.6lakhcroreor$107billion.Thecashpilewasup17percentinFY14overthepreviousyearandhas
expandedataCAGRof13.4percent,beatingnetprofitgrowthof12.1percentduringtheperiod.