When the covid-19 pandemic first arrived last year, firms across the world were staring at deep revenue losses as lockdowns brought life to a standstill. Markets tanked globally even before the World Health Organization declared a global pandemic. But they also recovered rapidly, partly in anticipation that the big and strong firms would ride out the pandemic storm, aided by an unprecedented global injection of fiscal and monetary stimuli.
At least in India, that story has played out to script, with the largest of the listed firms able to limit the hit to their balance-sheets, and raising operating profits by slashing expenses. Many firms deleveraged their balance sheets by taking advantage of lower interest rates even as others built up higher cash reserves to prepare for future shocks. While small firms were hit hard by the pandemic, larger firms have been able to build up a record war chest.
A Mint analysis of the financials of 333 firms from the BSE-500 index (excluding banks and financials, and including only those firms for which past data was available) shows that their aggregate cash and bank balances grew at the fastest clip (27.3%) in a decade in fiscal 2021. The BSE-500 index comprises the 500 most valuable firms that trade on the bourse.
The rise in the cash hoard has been secular, with nearly all sectors witnessing a sharp uptick in cash reserves. 70% of the firms analyzed saw a rise in cash reserves. Only the smallest of the lot saw cash reserves decline because of a decline in profits.
The growing cash hoarding seems to have come at the cost of investments. Indian companies have been reluctant to invest for many years now. Uncertainty around the pandemic and its economic impact seems to have led to a collapse in investment sentiment. For the BSE-500 set of firms, net fixed assets grew just 6.6% against an average 10% plus growth in the previous four years.
For this set of firms, capex growth peaked in 2015-16 at 20% growth. The twin shocks of demonetization and GST pulled down capex growth in the following years. After a brief recovery in fiscal 2019, things have gone downhill once again. Data from the Centre for Monitoring Indian Economy’s (CMIE’s) project-tracking database suggests that the capex drought has continued into the first quarter of this fiscal.
The capex hit was most pronounced in sectors such as textiles, telecom and FMCG segments where the net fixed assets contracted in fiscal 2021. Sectors such as power, oil and gas, and chemicals saw relatively high capex outlays.
Apart from cutting back on capex, companies tightened their belts to boost cash buffers over the past fiscal. The aggregate operating profits of the BSE-500 firms jumped 26.5% as expenditures fell 14.3% over the past fiscal. The net cash from operating activities too jumped by a whopping 40.3% over the same period. Net profit margins expanded by 2.9 percentage points to 9.7%, the highest since 2011.
Nearly half of the 333 firms saw profits grow over the past fiscal. Among this lot, the largest corporations showed greater resilience compared to their smaller and mid-sized counterparts.
Companies cut back on wage bills and raw material costs, drew down inventories, and seem to have tried every trick in the book to optimize costs and raise profit margins in a year when revenues were tepid for most firms.
Although business sentiments were weak, companies were able to pay out record dividends in the past fiscal year. Dividends had stagnated in fiscal 2020 for the BSE-500 firms, growing just 1% over the year-ago period. In fiscal 2021, dividends rose a whopping 31% to nearly ₹2 trillion. A change in dividend taxation policy, with greater tax burden on the recipient, may have also contributed to this jump.
Last fiscal’s payout translates into a dividend payout ratio (total dividends relative to net profits) of nearly 55%, 11.1 percentage points higher than the median payouts in the previous five years.
The limited appetite for fresh investments, and the growing cash pile seems to have led many firms to make generous payouts to shareholders. While this may have boosted investor fortunes, the absence of significant investments by the country’s largest firms should be cause for concern. Unless firms are willing to invest and expand capacity, the job market will remain sluggish, and this will constrain domestic demand and reduce incentives to invest further, potentially creating a vicious doom loop.
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