Why Gujarat's PSUs May Struggle To Spend On Capex

The Gujarat government's new dividend policy may starve state government-owned companies of free capital to spend on expansion plans.

Among public sector units in the state, companies including Gujarat Narmada Valley Fertilisers and Chemicals Ltd., Gujarat Mineral Development Corp. Ltd. and Gujarat Gas Ltd. may not be left with enough capex capital as they will have to share a higher proportion of their profits as dividend.

In April, the Gujarat government introduced a policy to govern the financial management and capital allocation practices of its state public sector undertakings. That includes norms for minimum dividend declaration, conditions for issuing bonus shares, buybacks and stock splits. It closely aligns with the central government's 2016 dividend mandate for central public sector enterprises.

The state PSUs have traditionally followed a conservative approach to financial management. But the new policy will serve as a guide for their capital restructuring plans to realise the potential for market capitalisation, net worth and investor returns, according to the policy document.

Minimum capital allocation norms can have both positive and negative effects. While they may increase market interest in the stock, they can also hinder the company's long-term growth plans.

Based on the policy, dividend payouts for the state's seven listed PSUs may rise fourfold in the next two fiscals. The calculations are based on five-year compounded earnings growth, or Bloomberg estimates whenever available, and five-year net-worth forecasts.

This stark increase in payouts may pose a challenge to some of these companies that BQ Prime has analysed.

In recent quarters, Gujarat Mineral Development's project in Tadkeshwar town in Surat district was halted because of landslides. And the company aims to expand capacity in Bhavnagar.

Generating sufficient capital for project recovery and providing for capital-intensive operations may be a challenge as the company will be required to share more profit. The company's capex guidance for fiscal 2024 and onwards is Rs 2,500 crore, while its cash reserves as of March 2023 are Rs 98 crore.

Gujarat Gas, with relatively low cash reserves, may face difficulties maintaining an adequate reserve margin in the future as earnings are directed towards dividend payments. According to reports, the company's capex estimates for current fiscal and the next are Rs 1,250 crore, while cash reserves stood at approximately Rs 680 crore.

Gujarat Narmada Valley is relatively positioned better as it has a cash balance of Rs 2,315 crore on its books as of March 2023. It plans to lay out Rs 2,000 crore for the next three years.

As higher dividend payout constraints ability to spend on capex, the companies may have to look at other resources to generate capital.

BQ Prime awaits a response on queries emailed to the three companies. Other Gujarat PSUs are not widely tracked.