What is a company to do when, despite going in for capital expenditure and paying out massive amounts as dividends, it finds that it is left with a huge amount of cash which it is forced to park in bank deposits and government bonds?
It could keep the cash on its books and promise every year to look for big-ticket acquisitions, as several software companies have done. It could decide to diversify into other businesses or even set up a financial services business with the money and hive it off into a separate company, as a two-wheeler giant is thinking of doing. Or it can simply say that it wants to stick to its knitting and it will therefore reduce its capital, paying out the cash it has stashed away in bonds and bank deposits to shareholders, because they could probably use it better than the company.
That’s precisely what Colgate-Palmolive India Ltd proposes to do.
After paying a dividend of Rs9.50 per share for the year, the company now proposes to pay back Rs9 to each shareholder, for which it will have to reduce capital and which will cost it Rs122.4 crore. After paying dividend tax, the total outflow will be Rs143.2 crore, but the company will still be left with a treasury portfolio of Rs170 crore, enough for its needs.
For FY 2007, toothpaste volumes grew by 9%. Net profit from operations for the full year is up 26%, after adjusting for a VRS payment and certain credits. Operating margins, at 15.6% in FY 07, are at almost the same level as in the previous year.
The company’s net working capital is negative, which means that all its current assets are funded by its current liabilities and it has a surplus left over. Add to that the cash thrown up from operations every year—Rs209 crore in FY 07—and the company generates far more cash than it needs.
Isn’t returning the cash an acknowledgment that the company is in an unexciting business and is unwilling to expand its product portfolio? The market certainly doesn’t think so, with the stock zooming 12.7% up on Friday. Better-than-expected March quarter results, gains in market share, the prospect of sustaining stronger top-line growth and expected cost savings coupled with the dividend yield have all combined to send the scrip higher.
The finance minister’s relief to the cement sector in the form of a shift to ad valorem excise duties hasn’t enthused analysts, although some cement stocks rallied on Friday. To start with, analysts point out that the duty structure has been changed only for cement priced between Rs191 and Rs250 per bag and cement priced above Rs250 per bag will continue to attract excise at Rs618 per tonne. Since cement sells in Mumbai at above Rs250 per bag, prices in the city won’t change.
More importantly, with the government determined to lower cement prices, companies will have to pass on the benefits in excise duties and there will be no change in net realizations for cement companies.
With the government keeping a close watch on prices and with the spectre of large capacity additions looming over the industry, the upside in cement stocks is likely to be limited, especially since they have already gone up quite a bit.