Gujarat defines a dividend formula, state PSUs surge

Shares of Gujarat State Fertilizers & Chemicals surged 20% and closed at a seven-month high of ₹153.3 apiece on the NSE. More than 5 crore shares changed hands on BSE and NSE, up 38.5 times their one-month average daily volume. Gujarat Mineral Development Corp also soared 20% with hefty volumes. Gujarat Alkalies and Chemicals jumped 17.2%. Gujarat Narmada Valley Fert & Chemicals gained a little over 10%, and Gujarat State Petronet rose 7.15%. All these stocks also witnessed a sizable increase in trading volumes.

“The policy is favourable for the shareholders, especially the minority ones,” said Nilesh Shah, managing director, Kotak Mahindra AMC. “It gives predictability and clarity to shareholders on how a company will distribute dividends or issue bonus shares.”

Shah said better clarity typically translates into higher governance standards for companies, which will make these firms more attractive to investors, thereby creating an opportunity to boost their valuations.

On Tuesday, the state government mandated Gujarat-based PSU to declare and distribute dividends that will be either a minimum 30% of net profit or 5% of its net worth, whichever is higher. However, only the minimum level and maximum permissible level of dividend should be declared.

IIFL Securities said GSFC will be the biggest beneficiary of this policy change. The company has more than ₹4,200 crore in investments in other Gujarat PSUs along with cash of ₹2,360 crore.

“GSFC and GSPL are our top picks,” IIFL Securities said in a client note. “Eventually, all the dividend and buyback benefits from the state-owned PSUs are likely to come to GSFC.”

Shah said there may be counterarguments that this policy may strip cash away from the profit-making PSUs. “However, some of these firms are not very efficient in allocating capex and hence it makes sense for them to reward the shareholders in the form of dividend,” Shah added.

The government has issued guidance for buyback, bonus shares, and splitting of shares as well.

“While few of the Gujarat state-run entities may be facing temporary headwinds in a few of its business verticals, the fact is that almost all of them are expanding in their product lines and looking to grow,” said S Ranganathan, research head, of LKP Securities.