IndiGo in rough weather over payout to promoters

Analysts question negative net worth because of dividend payout ahead of IPO

IndiGo has run into rough weather ahead of its initial public offering (IPO), with investors and analysts questioning the company's promoters for taking dividends higher than the airline's net profit through the past five years.

In its red-herring prospectus filed with exchanges on Friday, IndiGo said, "Our company had negative net worth of Rs 139.39 crore as of June 30, 2015. If this financial position continues, it might make it more difficult or expensive for us to obtain future financing or meet our liquidity needs. Further, there can be no assurance that we will achieve positive net worth in periods going forward."

InterGlobe Aviation, which runs IndiGo, paid a cumulative dividend of Rs 3,494 crore to its promoters in the past five years, for which its post-tax profit was Rs 3,441 crore. The net profit excludes minimum alternate tax credit of Rs 473 crore. If dividend distribution tax of Rs 648 crore through the same period is added, the total outgo on the dividend account rises to more than Rs 4,100 crore. In addition, the promoters will earn Rs 1,700 crore through share sale in the IPO (October 27 to 29).

In a note, Deven Choksey of KRChoksey asks, "Why are promoters taking out so much money from the company? While on operating parameters, the company is an outstanding one, this trait of promoters is not very convincing."

IndiGo's management has a very clear view on this. Aditya Ghosh, president of the company, says: "We are generating cash flows and we are profitable. We hardly have a capex requirement. We did not declare a dividend in financial year 2012 though we were profitable because we felt it was more prudent to keep cash in the company."

"Going forward, our view will be the same - do what is in the best interest of the business and keep shareholders in focus. In any case, we have paid interim dividends every year. With regard to the negative net worth, it was as of that date, and we are back in positive net worth zone," he added.

Amit Tandon, managing director of Institutional Investor Advisory Services, says the shareholders to whom the money belongs are taking it out. However, from a regulatory stand-point, audit firms say a company has to set aside 10-12 per cent of profits towards reserves. There is, of course, a provision under the companies Act that allows a company to declare dividend from reserves, as is the case with IndiGo.

When it comes to dividend distribution, not all companies follow such a practice. In FY15, the dividend payout ratio (share of dividend as percentage of net profit) of Tata Consultancy Services was 89 per cent; it was 51 per cent for ONGC and 87 per cent for Hindustan Unilever. The head of a large audit firm says what IndiGo has done is unusual.

Analysts are concerned IndiGo has chosen to pay dividends and not built reserves or lowered debt. Tandon of IiAS, says, "The new investors need to weigh this against its impact on the leverage ratio and business plans, which the bankers should have baked into the numbers while finalising the issue price."

Sandeep Parekh, founder of Finsec Law Advisors and former executive director, Securities and Exchange Board of India, said, "Investors should discount such companies because they know what the management has done in the past."