India Inc's FY22 shareholder payout higher than biz reinvestment

Corporate India now pays more cash to its shareholders by way of equity dividends and share buybacks than it reinvests in its business for future growth.

In 2021-22 (FY22), listed non-financial companies returned a record Rs 3.05 trillion to their shareholders through dividends and share buybacks, but invested only Rs 1.12 trillion in fixed assets. 

Annual investment in fixed assets in FY22 was down 49.1 per cent year-on-year (YoY), while total payout to shareholders was up 18.8 per cent YoY.

FY22 was the second consecutive year when shareholder payout exceeded annual investment in fixed assets.

In 2020-21 (FY21), listed companies in the Business Standard (BS) sample had paid Rs 2.56 trillion to their shareholders, while they had invested Rs 2.2 trillion in fixed assets during the year.

The analysis is based on the annual profit/loss and balance sheet of a common sample of 955 companies that are part of the BSE 500, BSE MidCap, and the BSE SmallCap indices. The sample excludes banks, non-banking financial companies, insurance, and stock and commodity brokers (BSFI). The sample also excludes listed subsidiaries of listed holding and operating companies to avoid double counting. All numbers are on priority consolidated basis and as reported by companies in FY22.

Analysts don’t expect the trend to change anytime soon, given the various macroeconomic headwinds that corporates face right now.

“Payout to shareholders will remain high even in the current year. There is still a lot of uncertainty in the domestic and global economy with historically high volatility in revenue growth,” says Dhananjay Sinha, managing director and chief strategist, JM Finance Institutional Equity.

The combined net profit of non-financial companies in the BS sample was up 63.5 per cent YoY to an all-time high of Rs 7.18 trillion in FY22 — up from Rs 4.39 trillion a year ago and Rs 4.31 trillion prior to the pandemic in 2018-19 (FY19). By comparison, the companies’ combined net sales was up 31.1 per cent YoY to Rs 87 trillion last financial year.

As a result, the total dividend payout (called payout ratio) in FY22 was equivalent to 42.4 per cent of corporate profits in FY22, while fresh capital expenditure (capex) represented 15.6 per cent of the earnings last financial year. By comparison, the dividend payout ratio was 58.4 per cent in FY21, while half the earnings were spent on fresh capex.

Besides paying higher dividends to their shareholders, companies also used the earnings boom to increase their cash reserves and deleverage their balance sheet. The combined cash and bank balance for the sample was up 13.4 per cent YoY to a record high of Rs 7.54 trillion last financial year. The company’s gross borrowings were up just 2.8 per cent YoY to Rs 35.91 trillion — growing at the slowest pace in seven years.  

A sharp jump in earnings led to a big jump in the return on assets (RoA), rekindling hopes of a rise in corporate capex in 2022-23 (FY23). The company’s RoA rose to a decade high of 13.3 per cent in FY22, compared with 10.8 per cent a year ago and 12.3 per cent prior to the pandemic (in FY19).

“The cash return on capital employed was the highest in FY22. The attractiveness of cash returns, coupled with robust capacity utilisation, has put manufacturers on the front foot,” says Vikaas M Sachdeva, chief executive officer, Emkay Investment Managers.

Analysts also raise doubts on the sustainability of the earnings growth, given its sectoral skew.

“In 2022, the corporate profit-to-gross domestic product ratio rebounded to a decade high of 4.3 per cent for the Nifty 500 universe. The growth in profit, however, was hardly broad-based and driven only by three sectors — BFSI, oil and gas, and metals,” write Gautam Duggad and Deven Mistry of Motilal Oswal Financial Services.

This raises the risk of a decline in corporate earnings and a worsening in return ratios, such as RoA and return on equity, in FY23 due to factors like a sharp rise in interest rates, decline in commodity and energy price, and export duty on steel and petroleum product exports. This, in turn, will inhibit companies from making a large capex.