Corporate Performance FY14 (Early results)
Corporate performance during the year was affected by the muted pace of economic growth
A study on the performance of 880 companies has showed that net sales increased by 12% in FY14 as against 15.3% in the previous year, while net profit increased by 8.2% in FY14 compared with growth of 13.1% in FY13. Accordingly, the net profit margin moderated from 9.8% to 9.5% during the fiscal. “The deterioration in the overall performance has been the outcome of muted investment and lower market demand,” says Care Ratings in a just released report.
Net sales recorded a growth of 12% in FY14 compared with 14.6% in the previous year. Lower growth in sales is attributed to weak industrial output during the year. Industrial output contracted by 0.1% for the second consecutive year over low growth of 1.1% in FY13 on account of lower investments and depressed consumer demand. Total expenditure across companies grew by 11.4% in FY14 as against 14.5% in FY13.
However, Interest expenses registered a significant decline. The growth rate dipped from 27.3% in FY13 to 17% in FY14. This may be attributed more to the lower demand for credit from industry and services rather than interest rates. RBI had increased interest rates by 75 bps during the year after lowering it by 25 bps to begin with.
Interest cover, defined as Profit before Interest and Tax (PBIT) to interest payments, remained unchanged at 2.9% during the fiscal.
Net profit margin (net profit to net sales) increased to 9.6% in the financial year as against 9.3% in the corresponding quarter of the previous year. This was a result of growth in net profit being higher than that in sales.
Banking Sector
- Financial results of 35 banking companies (does not include SBI) showed that net sales (interest earned) increased by 12% in FY14 as against 17.2% in the previous year.
- The growth in ‘provisions and contingencies’ increased to 37% (24.2%) in FY14. Higher provisions were necessitated on account of build-up of NPAs.
- Net profit witnessed a sharp decline of 9.1% as against 9.4% in the previous year.
- As a result, net profit margin continued to be under pressure and declined to 9.1% as against 11.2% last year.
- Non-performing assets (NPAs) have increased sharply during the year as a slowing economy resulted in higher quantum of bad loans.
- Gross NPAs and the net NPAs as a percentage of advances surged to 3.5% (2.82%) and 2.04% (1.57%) respectively in FY14.
- Gross NPAs increased by around 43% from Rs 120,664 crore to Rs. 172,409 crore for these 35 banks. Net NPAs increased by 47.3%.
- Gross NPA has increased by Rs 51,745 crore in FY14 while the advances have shown an increase of Rs 6.5 lakh crore, resulting in incremental gross NPA ratio of 8%. Depressed economic conditions were responsible for high NPAs.
- On the positive side, banks have maintained capital adequacy ratio of above 10% (data available for 35 banks). Out of the 35 banks 8 reported an increase in this ratio in FY14 when compared with the previous fiscal.
To sum up, Corporate performance during the year was affected by the muted pace of economic growth. The banking sector did push down overall performance while non-bank companies did witness improvement in profit margins. In case of banks, the NPAs continued to rise sharply thus putting pressure on profit margins. However, as per norms banks maintained the minimum capital adequacy requirements during the year.
BSE 500 Corporates to Borrow INR180bn-INR200bn for FY14 Dividend Payments
Several BSE 500 corporates (excluding banks and financial services companies) adopted an aggressive dividend payment strategy in 2013, despite a reduction in their net profits. India Ratings & Research (Ind-Ra) says that “ it expects 419 of the BSE 500 corporates to pay an aggregate dividend of INR1,000-1,200bn in FY14 and avail aggregate debt of INR180bn-INR200bn for the same.”
The agency estimates that the 419 corporates availed INR191.8bn of debt in FY13 to fund the aggregate dividend payment of INR1,049bn. The trend of dividend payment behaviour over FY09-FY13 suggests that in most instances cash flow from operations (CFO) was adequate and instances of debt requirement declined steadily from FY11-FY13. However, the total quantum of debt needed increased sharply in FY13 (after declining in FY12) due to an increase in dividend payments and a reduction in profit after tax (PAT).
In Ind-Ra’s assessment, 37 public sector units (PSUs) among the 419 corporates paid aggregate dividend of INR450.6bn in FY13, and of these, eight PSUs had to borrow INR128.9bn due to inadequate CFO. However, considering the sovereign linkage of these PSUs, their credit profiles are unlikely to be impacted. However, more worrisome may be case of 12 private corporates with high leverage above 5.0x, which could have borrowed an estimated INR27.7bn to pay dividends.
Lenders have to watch out for corporates whose CFO is negative or have CFO below the amount of divided paid, while PAT may be positive. In some of these cases, dividend payments could be financed by debt, even when financial leverage is high. As such, some loan documents have covenants with respect to dividend payments, but they usually require the borrower to inform or seek approval from bankers before paying dividends. Decision triggers are usually accounting profit, balance sheet net-worth or debt/equity ratio.
In the report, the agency has explained that under The Companies Act 2013 a corporate can pay dividend out of its current or past accounting profit, in essence out of PAT. However, it is possible that while a corporate can generate positive PAT, its CFO may be negative due to high working capital requirements to support revenue and EBITDA profits. In such cases a company paying dividend higher than its CFO is likely to tap its cash reserves, investments and non-recurring income. If this is insufficient, the company would effectively rely on debt to finance dividends. Reliance on cash reserves or debt to partly or fully fund dividend payments has a negative impact on net leverage (adjusted debt net of cash dividend/EBITDA) and the overall credit profile.