Gujarat’s new PSU policy: Analysing the potential and scope for a dividend bonanza

Gujarat’s public sector undertakings (PSUs) have garnered attention due to the recent changes in the State government’s rules relating to minimum dividend payment, bonus shares and buy back of shares.

As the investors have cheered the new framework with the stock prices gaining nearly 28 per cent on a weekly basis, we analyse the recent financial performance of the Gujarat PSUs to know the prospects for dividend growth.

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State PSUs will now have to declare dividend equivalent to 30 per cent of the post-tax profit or 5 per cent of their net worth, whichever is higher.

Interestingly, the pay-out ratio for these companies in FY22 ranged between 5 per cent and 24 per cent, with Gujarat State Petronet paying the least dividend (5 per cent of post-tax profit), while Gujarat Industries Power had paid its shareholders 24 per cent of its post-tax profit.

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Applying the new rule to the FY22 numbers, the dividend under the new policy will be higher by 75 per cent to a whopping 666 per cent.

While our calculation reveals that State-owned minerals and lignite mining company Gujarat Mineral Development Corporation (GMDC) should see the least increase in dividend (compared to FY22), Phosphatic fertiliser maker Gujarat State Fertilizers & Chemicals (GSFC) can see almost 7-fold increase in dividend given the company’s strong profitability as well as robust net worth and its low pay-out ratio at 11 per cent of the net profit. For instance, in FY22, the company’s dividend outgo was about ₹87 crore, while the new rule will require the company to fork out as much as ₹580 crore as dividend.

Other companies that will end up paying significantly high dividend in FY24 include Gujarat State Petronet, Gujarat Alkalies and Gujarat Narmada Valley Fertilisers and Chemicals (GNFC) in the same order. For Gujarat Gas, the dividend outgo will possibly be 2 times its FY22 dividend.  

Buy back

Gujarat government has now mandated PSUs to exercise the buy back option if they have a minimum net worth of ₹2,000 crore and cash and bank balance of ₹1,000 crore. Going by the GNFC’s balance sheet of September 2022 and trailing twelve-month profit performance, the company is eligible to exercise the buy back option as it had a cash and bank balance of ₹1,369 crore as of September 2022 and net worth of ₹8,490 crore. Gujarat State Petronet with a bank balance of ₹947 crore as of September 2022, comes a close second and can possibly qualify for doing a buyback.

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Interestingly, all the seven PSUs sport a low equity capital base given that they have not raised equity in recent times, thanks to the healthy profitability and cash flows. Thus, all these companies have a large shareholders’ fund corpus, which will qualify them all for issuing a bonus.

Under the new policy, companies with reserves more than 10 per cent of the capital will now be able to issue bonus shares. Most impressive among the pack is GSFC as it managed to shore up its shareholders’ funds to ₹11,600 crore (as of September 2022) with a ₹80-crore equity capital base. Likewise, Gujarat Alkalies has managed to grow its shareholders’ fund to ₹6,122 crore as of September 2022, with a meagre equity base of ₹73 crore.

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As these companies have been growing at a steady pace, the dividend payment will also remain healthy, translating into impressive dividend yield for investors. Also, all of these companies are either debt free or have negligible debt (Gujarat Industries Power, Gujarat Gas and Gujarat State Petronet).

The move to increase pay out to investors by way of dividend, bonus shares and share buy backs is positive for the investors as it helps build confidence and can possibly support valuation for these companies as most of them trade at single digit price-earnings multiple, implying a steep discount to their private sector peers.

However, with many of them having plans for capital expenditure, it remains to be seen how companies will strike a balance between pay-outs to investors and redeployment of funds into the business.  

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For instance, GSFC has planned capex of over ₹720 crore for the next two years, while GNFC has planned to invest ₹4,200 crore over the next 3-5 years, including on expansion of existing product lines as well as new projects such as polycarbonate facility (₹2,500 crore) and a green hydrogen facility (₹400 crore).