Downturn to hit dividend payout

Less firms declared divided this year, and with a lower payout ratio, even as earnings come under strain.

The aggregate dividend payout by corporate India may be lower in the current financial year (2011-12), compared to 2010-11.

Only 75 companies had declared an interim dividend in the first half of the current financial year, as compared to 107 in 2010-11.

Moreover, the payout by these companies declined to 32 per cent of net profit, as compared to 40 per cent at the same time last year.

And, a 27 per cent decline in the second quarter of 2011-12 indicates earnings for the third and fourth quarter may be worse.

The study by the Business Standard Research Bureau estimates the total dividend payout at Rs 7,285 crore (Rs 72.85 billion) by 75 companies in the first six months, compared to Rs 7,290 crore (Rs 72.90 billion) by 107 companies in the corresponding period of last year.

Though the aggregate payout remains almost unchanged, the payout ratio has dropped to 32 per cent from 40 per cent in the previous year.

The payout ratio dropped, as noted earlier, despite a 22.3 per cent rise in net profit of the 75 dividend-paying companies in the first half, compared to a 12.3 per cent rise in net profit of the 107 companies doing so in the same period last year.

It is usually when companies earn handsome profits that they reward shareholders with dividends. If one goes by the huge losses of Rs 37,151 crore (Rs 371.51 billion) by 562 companies in the first two quarters, the corporate payout will be significantly lower this year.

The major impact will be felt if the public sector oil marketing companies continue to bleed.

Among the top dividend payers in 2010-11, Indian Oil Corporation had reported a net loss of Rs 11,204 crore (Rs 112.04 billion) in the first six months, followed by Hindustan Petroleum at Rs 6,444 crore (Rs 64.44 billion) and Bharat Petroleum at Rs 5,791 crore (rs 57.91 billion).

The payout will be significantly impacted due to a fall in net profit of public sector banks.

The main villain is the current economic slowdown and high cost of borrowing. India Inc's profit for the six months ended September has fallen 13 per cent from the corresponding period of the previous year, and analysts expect the trend to continue in the next two quarters.

Earnings pressure is expected for the globally-sensitive sectors such as information technology, services, metals and refining, and domestically-focused sectors such as banking (lower credit growth) and automobiles (lower demand and margin pressure).

Already, domestic and foreign brokerages have downgraded Sensex earnings by a little over 10 per cent for both 2011-12 and 2012-13 due to growth concerns, a depreciating currency and interest rates.

Now, the fear is that the downturn in investment climate, as seen from a 1.9 per cent increase in India's industrial output in September, provide further evidence of deceleration in the economic cycle.

According to Motilal Oswal Research, the first half's revenue collection has been weak at 38 per cent of the total budgeted estimates.

While expenditure is on track at 48 per cent, the fiscal deficit has soared to 68 per cent of the FY12 budget.

Reflecting the downturn in investment climate and lower confidence, foreign institutional investor investment has come down to a trickle.