Are MNCs better at generating cash from their companies than their domestic counterparts?
Data on dividend seem to suggest so -- for FY15, there were four MNCs among the top 10 companies with dividend-earning promoters.
While the Tatas topped the list with total promoter dividend earnings of Rs 12,018 crore (Rs 120.18 billion), American tech giant Oracle was the second (Rs 4,193.4 crore or Rs 41.93 billion), followed by Unilever (Rs 2,181.8 crore or Rs 21.81 billion).
By contrast, many of India’s prominent business houses earn low amounts as dividend from their companies, with the exception of tech majors.
Azim Premji of Wipro was India’s fourth-highest dividend earner in FY15, with dividend income of Rs 2,174 crore (Rs 21.74 billion).
He was followed by Mukesh Ambani, who earned Rs 1,464 crore (Rs 14.64 billion) as dividend from Reliance Industries.
Infosys promoters were the seventh-highest dividend earners (Rs 890.3 crore or Rs 8.9 billion), while HCL Tech promoter Shiv Nadar was ranked 12th, with total dividend income of Rs 431.6 crore or Rs 4.31 billion (the data for HCL Tech is for the year ended June 2014, as the company follows the July-June financial year).
In all, promoters (including the central government) earned about Rs 73,800 crore (Rs 738 billion) as dividend from their companies in FY15, up 4.5 per cent over the previous financial year.
On an average, promoters accounted for half the overall equity dividend distributed by BSE 500 companies in FY15.
This varies from a high of about 70 per cent in the case of multinational and government-owned companies to low double digits in the case of many family-owned business groups.
The analysis is based on the equity dividend (interim and final) paid or announced by BSE 500 companies for 2014-15.
Promoters’ actual dividend income could be a little higher, as the number of listed firms is much higher and many businesses have unlisted dividend-paying companies, too.
Promoters’ dividend income is the net cross-holding of various listed group companies in each other.
For instance, the dividend income of the Tata group promoter is that accruing to unlisted holding and investment companies such as Tata Sons, Tata Industries and Ewart Investments; it excludes what the group’s listed companies such as Tata Investment Corporation, Tata Steel and Tata Power earn as dividend from other group companies.
Very few Indian promoters, with the exception of tech barons, own shares in their personal capacity; typically, the dividend income accrues to their holding and investment companies, besides family trusts and endowments.
Promoters’ dividend income is the sum of the earnings of all these entities, as well as personal holdings, if any.
Experts attribute the trend in dividend earnings to the greater presence of MNCs in cash-rich and less capital-intensive businesses, as well as higher re-investment by Indian companies.
“Largely, multinationals operate in cash-rich sectors such as FMCG (fast-moving consumer goods), domestic pharma and IT services.
“These industries need only small recurring capex and the bulk of cash flows can be safely distributed among shareholders.
“By comparison, Indian promoters operate in capex-intensive sectors such as automobiles, energy, cement, metals, infrastructure and power.
“Here companies need to reinvest a large share of cash flows to fund growth,” says Sivarama Krishnan, partner and head (risk advisory), PwC.
“Dividend is largely a function of a company’s investment philosophy. Indian promoters are value-driven and believe in growing their wealth through re-investment rather than maximising their cash income through higher dividend,” says Rakesh Valecha, head (corporate ratings), India Ratings.
The Holcim-owned ACC and Ambuja Cement distribute a higher share of net profit as dividend (up to half) compared to either UltraTech Cement or Shree Cement.
“Indian promoters are high on growth, while MNCs are more cash-oriented and use cash flows to reward shareholders, including foreign promoters,” says Devang Mehta, senior vice-president and head (equity sales), Anand Rathi Financial Services.
Indian companies use surplus cash to either scale up presence in the segments in which they are present or enter new ones. Mahindra & Mahindra, for instance, used surplus cash from the tractors category to enter the automobiles, auto components, IT services, financial services, real estate and hospitality segments, among others.
For most business groups, the flagship firm is the vehicle for diversification in other sectors.
This creates a web of cross-holdings that reduce the direct dividend earnings of promoter families.
For instance, the AV Birla companies included in the sample distributed total equity dividend of Rs 953 crore (Rs 9.53 billion) in FY15 but only 17 per cent of this (Rs 160.4 crore or Rs 1.6 billion) accrued to promoters; the rest went to minority shareholders or other listed firms of the group, owing to cross-holding.
Similarly, though Bajaj and Bharti group companies were among the top dividend payers, less than a fifth of this accrued to their promoters.
The Tata group is an exception, as most of the its diversification is funded by Tata Sons, thanks to high dividend income from Tata Consultancy Services.
In FY15, Tata Sons earned dividend of Rs 11,400 crore (Rs 114 billion) from TCS. In all, 68 per cent of all equity dividend distributed by various Tata group companies accrued to Tata Sons and other holding and investment companies.
The image is used for representational purpose only. Photograph: Mike Segar/Reuters