When the covid-19 pandemic first arrived last year, businesses around the world faced severe revenue losses as lockdowns brought death to life. Markets have collapsed around the world even before the World Health Organization declared a global pandemic. But they also recovered quickly, in part anticipating that big and strong corporations would weather the pandemic storm, aided by an unprecedented global injection of fiscal and monetary stimuli.
At least in India, this story unfolded according to scenario, with the largest of the listed companies being able to limit the blow to their balance sheets and increase operating profits by cutting expenses. Many companies have deleveraged their balance sheets by taking advantage of lower interest rates even as others have built up higher cash reserves to prepare for future shocks. While small businesses have been hit hard by the pandemic, large businesses have been able to build up a record war chest.
A Mint analysis of financial data from 333 companies in the BSE-500 index (excluding banks and financial services, and including only companies for which historical data was available) shows that their cash balances and Aggregate banks grew at the fastest rate (27.3%) in a decade during fiscal 2021. The BSE-500 index includes the 500 most valued companies that trade on the stock exchange.
The increase in cash reserves has been secular, with almost all sectors experiencing a sharp increase in cash reserves. 70% of the companies analyzed saw their cash reserves increase. Only the smallest of the lot saw their cash reserves shrink due to lower profits.
The growing hoarding of liquidity seems to have come at the expense of investments. Indian companies have been reluctant to invest for many years. The uncertainty surrounding the pandemic and its economic impact appears to have led to a collapse in investment sentiment. For all companies in the BSE-500, net fixed assets grew only 6.6% compared to an average growth of 10% more over the previous four years.
For this set of companies, growth in capital spending peaked in 2015-16 with growth of 20%. The double shock of demonetization and the GST reduced the growth of capital spending in subsequent years. After a brief recovery during the 2019 financial year, things took a turn for the worse. Data from the Indian Economic Monitoring Center (CMIE) Project Tracking Database suggests that the investment spending drought continued into the first quarter of this fiscal year.
The impact of capital spending was most pronounced in sectors such as textiles, telecommunications and FMCG segments where net fixed assets contracted in fiscal year 2021. Sectors such as electricity, oil and gas, and chemicals recorded relatively high capital expenditures.
In addition to reducing capital spending, companies tightened their belts to increase their cash reserves in the past year. Aggregate operating profits of BSE-500 companies jumped 26.5% as expenses fell 14.3% in the last fiscal year. Net cash from operating activities also jumped 40.3% over the same period. Net profit margins increased 2.9 percentage points to 9.7%, the highest level since 2011.
Almost half of the 333 companies saw their profits increase in the last fiscal year. Among this batch, the larger companies have shown greater resilience compared to their smaller and medium counterparts.
The companies cut payrolls and raw material costs, cut inventory, and seem to have tried every trick in the book to optimize costs and increase profit margins in a year when revenues were low for most companies. companies.
Although corporate sentiment has been low, companies have been able to pay record dividends over the past year. Dividends had stagnated in fiscal 2020 for BSE-500 companies, increasing only 1% from the previous year. In fiscal 2021, dividends increased by 31% to almost ₹2,000 billion. A change in dividend tax policy, with a higher tax burden on the recipient, may also have contributed to this jump.
The last year’s payout translates into a dividend payout ratio (total dividends to net earnings) of almost 55%, 11.1 percentage points higher than the median distributions of the previous five years.
The limited appetite for new investments and increased liquidity seem to have led many companies to make generous payments to shareholders. While this may have increased investor fortunes, the lack of significant investment by the country’s largest companies should be of concern. Unless companies are willing to invest and expand capacity, the labor market will remain sluggish, limiting domestic demand and reducing incentives to invest more, potentially creating a vicious catastrophic loop.
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