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Centre may Rake in ₹55,000 cr in Dividends from Key CPSEs

CPSE Payouts Surpass Target, but Stake Sales Fall Short, Impact on Fiscal Math

Source and Citation: Centre may Rake in ₹55,000 cr in Dividends from Key CPSEs, ET Bureau, Jan 8, 2024

Analysis for Layman

The Indian government anticipates collecting a total dividend of Rs 55,000 crore from state-owned companies (CPSEs) this fiscal year, surpassing the budgeted target by over 25%. Robust profitability in sectors like power and minerals, driven by post-COVID demand, has enabled record payouts.

However, the proceeds from the privatization of state assets may fall short of the Rs 51,000 crore goal. The prolonged strategic sale of IDBI Bank may extend into the next fiscal year, impacting overall receipts from stake sales and CPSE dividends, totaling Rs 94,000 crore.

As taxes from divestment lag, the finance ministry might revise the combined estimates, acknowledging a minor shortfall in non-tax revenue compared to the overall revenue.

Despite exceptional payouts by companies like Hindustan Zinc being one-offs, hopes of matching last year’s dividend tally of nearly Rs 59,000 crore seem distant. Additionally, state oil companies may limit dividends if profits decline due to the Israel-Hamas crisis and potential spikes in global crude prices.

Centre may Rake in ₹55,000 cr in Dividends from Key CPSEs

Impact on Retail Investors

For retail investors, updates on CPSE payouts and privatization plans offer insights into fiscal health and reform momentum. Record dividends indicate the strength of many state firms, though sustained outperformance is uncertain.

Delays in strategic sales of IDBI, CONCOR, BEML highlight the complexity and length of overhauling the public sector. Steady dividends, albeit cyclical, support investors, emphasizing the importance of monitoring global commodities.

While stocks like Coal India, ONGC, and IOCL have direct ties to fossil fuel earnings, new-age investors may perceive them as legacy firms. Privatization delays may benefit banking names like SBI and BoB in the interim, even if divestment occurs later.

Beyond short-term stock considerations, investors should focus on fiscal risks if receipts fall below revised estimates and ongoing reform momentum through asset sales.

Impact on Industries

Oil & Gas:

Geopolitical risks related to the Israel-Hamas crisis create uncertainty in crude prices, impacting state energy majors like ONGC and OIL. However, demand upside is possible if the conflict escalates.

Banking:

Delays in the strategic sale of IDBI Bank and stake offloading in other state banks maintain the status quo, offering temporary relief to public sector banks.

Power:

Firms like NTPC and PowerGrid are expected to sustain dividends with rising domestic demand. The push for renewables by the center supports volumes, with less direct exposure to global commodity cycles.

Railways:

Divestment plans for CONCOR (in FY24-25) and IRCTC over 1-2 years provide promise, allowing firms to enhance logistics and tourism services. Long-term positives are expected regardless of near-term delays.

Insurance:

The listing plan for LIC marks a milestone in sector reform, boosting investment appeal. However, trade-offs between growth and dividends exist as a mega-insurer playing a national role.

Long-Term Benefits & Negatives

Positives:

  • Higher payouts by state firms, signaling operational robustness.
  • Delays in strategic sales are temporary; the government intends a more significant role in asset monetization.
  • Retaining select marquee names under public control ensures balance in financial stability and development goals.

Negatives:

  • Overdependence on dividends builds cyclical vulnerabilities.
  • Slow divestment may impact investor trust in commitment to reforms.
  • Strategic buyer interest can fluctuate amid market cycles.

Short-Term Benefits & Negatives

Positives:

  • Healthy dividends from state firms aid fiscal position.
  • Confidence in the near-term economic trajectory is reflected through demand uptick.
  • Lower global commodity inflation supports input costs, maintaining dividends.

Negatives:

  • Geopolitical or supply shocks can raise input costs, squeezing margins.
  • The election cycle might limit political will for material reforms.
  • One-off payouts of the past year are unlikely to repeat.

While rich dividends offer income visibility, restructuring state firms and the asset base is necessary for sustainable revenues, acknowledging near-term turbulence on this path.

Impact of Potential Higher Dividends from Indian CPSEs

Indian Companies that could gain:

  • Indian Government: Exceeding the budgetary target for dividend income would provide the government with additional funds for public expenditure and welfare programs. This could potentially improve their fiscal balance and strengthen their credit rating, boosting investor confidence in the economy.
  • CPSEs with strong financial performance: Companies like Coal India, ONGC, and NTPC, which are expected to maintain good profitability, could potentially increase their dividend payout ratios, leading to higher returns for shareholders. This could positively impact their stock prices and investor sentiment.
  • Banks and Financial Institutions: Increased dividend income from CPSEs could benefit banks and financial institutions that hold significant investments in these companies. This could boost their earnings and potentially improve their capital adequacy ratios.
  • Mutual Funds and ETFs: Mutual funds and ETFs investing in CPSE stocks could see higher returns if dividend payouts increase. This could attract more investors to these funds, further increasing demand for CPSE stocks.

Indian Companies that could lose:

  • Divestment Targets: The expected shortfall in disinvestment proceeds could delay the privatization of some CPSEs. This could affect companies hoping to benefit from such acquisitions and delay potential restructuring and efficiency improvements.
  • CPSEs impacted by global volatility: Companies like ONGC and IOCL, whose profitability is dependent on global oil prices, could face uncertainty if prices remain volatile. This could impact their dividend payout potential and negatively affect their stock prices.
  • Companies in struggling sectors: CPSEs operating in sectors like power and airlines might not be able to maintain high dividend payouts due to their own financial challenges. This could disappoint investors and potentially lead to stock price declines.

Global Companies:

  • Global Investors in Indian Stocks: Increased government revenue and potential for higher dividends from CPSEs could improve investor sentiment towards Indian equities. This could attract more foreign investment and support the Indian stock market.
  • Global Oil & Gas Companies: If oil prices remain high, global oil and gas companies could benefit from increased demand and profitability. However, further escalation of the Israel-Hamas conflict could lead to higher price volatility and uncertainty.
  • Global Infrastructure and Engineering Companies: Increased government spending on infrastructure projects fueled by higher revenue could create opportunities for global infrastructure and engineering companies operating in India.

Global Companies that could lose:

  • Companies Exporting to India: A stronger Indian rupee due to improved fiscal health could potentially make Indian exports more expensive, impacting companies heavily reliant on exports to India.

Overall Market Sentiment:

The news of potentially higher dividends from CPSEs is likely to be met with positive sentiment in the Indian market. However, various factors like global oil prices, government spending priorities, and individual company performance will determine the impact on specific sectors and companies.

Please note: This analysis is based on the information provided in the news article and does not constitute financial advice. Investors should conduct their own research and consult with qualified professionals before making any investment decisions.

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