Mahesh vyas writes in CMIE……
Financial statements of Indian companies show that they have been very reticent, in recent years, in investing in fixed assets and particularly so in investing in plant and machinery. In 2017-18, net fixed asset investments of non-finance companies grew by 7.9 per cent in nominal terms. At the same time, investments into plant and machinery grew by a significantly lower 6.8 per cent. These were the lowest growth rates since 2004-05, i.e. in 13 years.
These growth rates were earlier estimated to be a bit higher at 8.4 per cent and 10 per cent. However, the latest estimates based on a larger sample of companies (8,544) shows that the growth rates in 2017-18 were substantially lower than estimated earlier. As the sample size increases further, the growth rates could decline a little more because companies that enter the sample late are usually also the ones whose performance is less-than the average.
While companies have reduced the growth in investments into fixed assets, they have awarded share holders increasingly higher dividends. Simultaneously, the share of profits retained in the company for possible future investments has also reduced substantially in recent years.
Put together, the above set of data indicates that corporate India has been giving investments into new capacities a thumbs down in recent years. Further, the data shows that this restraint of corporate India towards investments has been pronounced since 2014-15.
In 2017-18, 64.4 per cent of the net profit of non-finance companies was distributed as dividends. This is close to the average of 65 per cent recorded in the past four years – since 2014-15.
The average payout ratio in the four years before 2014-15, i.e. from 2010-11 through 2013-14 was much lower at 45 per cent. It was even lower between 2006-07 and 2009-10, at 26 per cent. The dividend payout ratio has been rising steadily since 2007-08 when it was at its historic low of 22 per cent. However, while the payout ratio never crossed 60 per cent till 2003-14, it has been consistently above 60 per cent since 2014-15. In fact, it peaked at nearly 71 per cent in 2015-16.
Companies have reduced the proportion of profits retained back for possible future investments. In 2017-18, about 25 per cent of net profits were retained.
The average share of retained profits in net profits in the four years till 2017-18 was 23 per cent. This compares very poorly with retained profits accounting for 47 per cent of net profits in the preceding four years.
Evidently, companies have not only shied away from investments in new capacities they have also left behind much less for future investments. Instead they have awarded shareholders with a larger-than-ever share of profits in the past four years.
Dividend payout is mostly insulated from a shrinking of profits. Net profits of non-finance companies have shrunk in nine of the 28 years since 1990-91. But dividends have shrunk only twice – once in 2008-09 and then in the latest year – 2017-18. Aggregate dividends shrunk 6.7 per cent in 2008-09 and by a negligible 0.2 per cent in 2017-18.
Dividends received by an investor was exempted from taxes for a very long time – from 1996-97. This changed in 2016-17 when dividend income in excess of Rs.1 million was taxed 10 per cent in the hands of investors. This could explain partly, the fall in the payout ratio from the peak of 71 per cent in 2015-16 to 61 per cent in 2016-17 and 64 per cent in 2017-18.
However, the 61-64 per cent payout ratio in spite of taxation of dividends – both at the company level and at the level of investors besides the taxation of profits at the company level indicates that investors are quite intent on taking out profits from companies and leaving little behind.
Companies have been drawing out dividends and not retaining profits in spite of the steady increase in cost of borrowing. At close to 9 per cent on an average, interest incidence in the past four years has been the highest compared to the past 15 years. This should have motivated companies to retain profits for investments rather than borrow. But, companies have been taking out profits in larger proportions.
Contrary to popular perception, the balance sheets of non-finance companies are not stressed to stop them from borrowing. The debt to equity ratio in 2017-18 was at a record low of 0.84 times. Corporate India has never seen such a low gearing ratio ever in the past. But, borrowings growth at 4 per cent in 2017-18 was at a 13-year low.
If the high cost of borrowing holds them back then they should have retained the profits. But, if they neither borrow nor retain profits, then one inference of their behavior is that they do not find sufficient need to invest at the moment. This is corroborated by the very low asset utilisation ratio that non-finance companies face. At 0.68 times in 2017-18, the total income to total assets ratio was the lowest in the history of Corporate India. Never in the past has Corporate India been able to extract so little from its assets.