Amid the gloom and doom on the bourses, the National Investment Trust's record breaking announcement, both in terms of timing ie the very next day of book closure, ie, July 1st, 2008 and in its proportions, Rs 6.50 per unit - the highest ever - must have delighted its 52,000 unit holders.
The record cash payout in a declining market would have also raised the expectations of investors of other equity funds since NIT has now fixed a benchmark for the industry. However, in our opinion it has sent a wrong message as the dividend payout is substantially higher than the NIT's real earnings.
Last year the Fund earned a total of Rs 19.812 billion, including capital gain of Rs 15.655 billion. This amounted to a total income of Rs 12.24 per unit. Of this, an amount of Rs 6.84 was attributable to restructuring while the balance earnings were realised income.
In addition, Rs 1.14 per unit was available from unrealized gains. NIT distributed Rs 6.20 per unit as dividend and the balance was transferred to reserves. This year, the net income dropped to Rs 4.013 billion, including capital gain of Rs 929 million only. Therefore, the earning dropped to less than Rs 2.50 per unit while the dividend payout increased from Rs 6.20 to Rs 6.50 per unit.
It is obvious that the Fund has dipped into its reserves to pay Rs 6.50 per unit cash dividend. We are not sure if the non-bank financial rules fully apply to NIT. The rules allow the Funds to borrow the payment for redemption up to 15 percent. However, the borrowing has to be adjusted within three months from sales. As of 30th June 2008, NIT has Rs 3.56 billion in cash and borrowings of Rs 2.85 billion.
And, redemption of units during the year amounted to Rs 23.022 billion and sale of units during this period was worth Rs 18.4 billion. The Fund has to borrow due to heavy redemption during the April-June quarter.
Therefore by declaring a dividend payout over and above the realised profits would be a significant burden for it. And a cash shortage may require more borrowing in a rising interest rate environment. This could impact future profits and dividend paying capacity of the Fund.
The NAV of the Fund has dropped from Rs 58 to Rs 51 per unit. And after dividend payout the new year NAV is Rs 43. Institutional investors in NIT will have to recognise the impairment in held-for-trade (HFT) portfolio in September quarter which could put further pressure on the already fragile market.
A drop in dividend payout from last year's level of Rs 6.20 could have impacted future sales. Buyers of units when the NAV was between Rs 66-67 per unit have already suffered a capital loss. Therefore, there were reasons to give a higher dividend than last year. But we need to live in a world of realities. Economic slowdown is very much evident. So is the high inflationary environment.
Borrowing costs will not ease. A more prudent policy of a low dividend could have impacted future sales and also resulted in more redemptions. It was, therefore, a difficult call.
But then who says life is easy. A mid-way declaration, ie, between Rs 2.50 earning and last year's dividend payout of Rs 6.20 per unit was a better option. But then this government, not at all shy of placing its cronies on the Public Sector Boards, would have had another excuse to do so. Therefore, the management proposed a record all time high payout, as a protective shield. And, the Board of Directors obliged.
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