India Ratings & Research (Ind-Ra) says
that several BSE 500 corporates (excluding banks and financial services
companies) adopted an aggressive dividend payment strategy in 2013, despite a
reduction in their net profits. Ind-Ra expects 419 of the BSE 500 corporates to
pay an aggregate dividend of INR1,000-1,200bn in FY14 and avail aggregate debt
of Rs. 18,000- Rs. 20,000 for the same.
The agency estimates
that the 419 corporates availed Rs. 191.8bn of debt in FY13 to fund the aggregate
dividend payment of Rs. 1,049 bn. The
trend of dividend payment behaviour over FY09-FY13 suggests that in most
instances cash flow from operations (CFO) was adequate and instances of debt
requirement declined steadily from FY11-FY13. However, the total quantum of
debt needed increased sharply in FY13 (after declining in FY12) due to an
increase in dividend payments and a reduction in profit after tax (PAT).
In Ind-Ra’s
assessment, 37 public sector units (PSUs) among the 419 corporates paid aggregate
dividend of Rs. 450.6 bn in FY13, and of
these, eight PSUs had to borrow Rs.
128.9 bn due to inadequate CFO. However, considering the sovereign
linkage of these PSUs, their credit profiles are unlikely to be impacted.
However, more worrisome may be case of 12 private corporates with high leverage
above 5.0x, which could have borrowed an estimated Rs. 27.7bn to pay dividends.
Lenders have to watch
out for corporates whose CFO is negative or have CFO below the amount of
divided paid, while PAT may be positive. In some of these cases, dividend
payments could be financed by debt, even when financial leverage is high. As
such, some loan documents have covenants with respect to dividend payments, but
they usually require the borrower to inform or seek approval from bankers
before paying dividends. Decision triggers are usually accounting profit,
balance sheet net-worth or debt/equity ratio.
In the report, the
agency has explained that under The Companies Act 2013 a corporate can pay
dividend out of its current or past accounting profit, in essence out of PAT.
However, it is possible that while a corporate can generate positive PAT, its
CFO may be negative due to high working capital requirements to support revenue
and EBITDA profits.
In such cases a
company paying dividend higher than its CFO is likely to tap its cash reserves,
investments and non-recurring income. If this is insufficient, the company
would effectively rely on debt to finance dividends. Reliance on cash reserves
or debt to partly or fully fund dividend payments has a negative impact on net
leverage (adjusted debt net of cash dividend / EBITDA) and the overall credit
profile.
Contacts:
Sudarshan Shreenivas
Associate Director
+91 22 4000 1783
Deep N Mukherjee
Senior Director
+91 22 4000 1700
Saraanya Shetty
Manager - Corporate
Communications and Investor Relations
Work:
+912240001729
Fax:
+912240001701 Email:
saraanya.shetty@indiaratings.co.in
India Ratings &
Research A Fitch Group Company
Wockhardt Towers,
West Wing, Level 4
Bandra Kurla Complex,
Bandra East
Mumbai, 400051 India
For latest ratings
and research updates, visit http://www.indiaratings.co.in/
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