Reinvest or give dividends to investors? India Inc caught in Catch 22 situation

New Delhi [India], October 26 : Amidst current high stock valuations companies are less inclined to give dividends or buy back shares. On the other hand, companies feel reinvesting amid weak growth shall raise supply and have its own risk.
As per a report by Nuvama the formal sector of India Inc, which comprises government and corporate sector, has restructured its operations, creating a foundation for possibly rewarding its shareholders. Yet, with current high stock valuations, companies are less inclined to offer dividends or buy back shares.
"For India Inc, restructuring is done, but high valuations lower appeal of rewarding (dividends) and warrant reinvesting. But reinvesting amid weak growth shall raise supply and risk undermining I-CRoIC" said the report.
However, as per report there's a catch, reinvesting funds during a time of weak economic growth could mean that companies are adding more supply to the market than it can absorb.
The report added that this oversupply could strain their Internal Cash Return on Invested Capital (I-CRoIC), a measure of how effectively a company is using its capital to generate cash.
"Investments in new markets could help a little, but curtailing supply until macro re-cycling starts may perhaps be the best strategy" the report added.
The report also mentioned that exploring new markets could be one way to offset this challenge, but it might only offer limited help.
While expanding into new markets could offset some of these concerns, the better strategy might be to limit supply growth until economic conditions stabilize.
For the market outlook the report noted that, short-term sentiment shows signs of nearing an oversold state, as reflected by the Nifty50 advance-decline ratio and overall market breadth.
This positioning suggests a potential pause in the market's recent downward trend, offering a chance for a short-term bounce. Analysts highlight that the Nifty index has corrected over 7 per cent from its recent peak, pushing it close to a crucial short-term support zone in the 24,000-24,300 range.
It said "Short-term market sentiment is nearing oversold territory, as indicated by the Nifty50 advance-decline ratio and broader market breadth. This suggests a pause in the decline and opens the possibility of a trading bounce".
The upcoming trading sessions will be closely watched for signs of sustained recovery, but investors are advised to remain vigilant as uncertainties around macroeconomic conditions continue to cloud the outlook.