IndiGo must continue its dividend policy to command respect

If promoters decide to change dividend policy for worse in future, then back calculations of money withdrawn will start all over again

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The respect and admiration that the promoters of IndiGo had earned for their operations of the airline suffered a significant dent when details of the initial public offering (IPO) filed with market regulator SEBI were made public.
 
InterGlobe Aviation, which runs IndiGo, paid a cumulative dividend of Rs 3,494 crore  to its promoters over the past five years, for which its post-tax profit was Rs 3,441 crore. Over Rs 1,100 crore was paid to the promoters in the first quarter of the current year as dividend from the previous year’s profit of Rs 1,256 crore.
 
InterGlobe Aviation’s promoters have thus raised many reasons for investors to be anxious.

 

First, they are approaching the market to raise funds after withdrawing the maximum money they could from the company, in the process leaving the company with a negative net worth. InterGlobe Aviation’s management says that a negative net worth is temporary. Profits from future quarters will bring the net worth back in positive territory.
 
Secondly, despite the negative net worth the company has increased the issue price of the IPO. The company is asking for a higher premium on a smaller balance sheet.
 
The amount raised from the IPO that will go to the company directly is almost equivalent to the dividend that the promoters have awarded themselves in the first quarter. Only around a third of the IPO proceeds will be used to retire part of its debt. The company will raise Rs 1,272.2 crore by issuing fresh shares and around Rs 1,700 crore through offer for sale, post reduction of the sale amount by over Rs 200 crore.

 
In other words, the amount the company will receive from the IPO will be roughly equivalent to the dividend amount for the year.
 
What is clear from these transactions is that, in the short run, the IPO will be more beneficial to the promoters, who are cashing out in part, rather than the company. The offer for sale seems to be conducted to give an exit to most of the financial partners in the company. The returns the investors and the promoters are getting through the IPO are many times higher than the amount invested.
 
So should one invest in a company where the promoter is bringing the company to the market with a clean slate, literally speaking?

 
From an investor point of view, what is important is the ability of the company to perform going forward. Rather than complaining over what the promoters and investors have made in the transaction what is important is to see if the strong performance of the company can be repeated going forward.
 
There is no doubt that IndiGo is the best run airline in the country. Its growth plans and ability to sweat its assets mean that the company will remain ahead of the crowd in the near future. One might argue that its valuation when compared to international peers looks expensive but the growth trajectory on which IndiGo will be flying is much steeper than its competitors.

 
But what is critical going forward is the dividend policy of the company, as mentioned by Kapil Kaul of Centre for Asia Pacific Aviation (CAPA) in a CNBC interview. Management comments and those from aviation industry are hopeful that the company will maintain a high dividend payout ratio.
 
For the first quarter of the current fiscal, which is generally a better quarter, the company has posted a profit of Rs 640 crore. Assuming that the company posts a profit of Rs 1,500 crore for the year and has a dividend payout of 60%, dividend outgo will be around Rs 900. The IPO valuation of around Rs 25,000 crore would mean a dividend yield of around 3.6%, which is marginally on the lower side.

 
But there is a big assumption here that the company will continue to reward its new shareholders in future in the same way it did its promoter shareholders in past. If the promoters suddenly decide to change their dividend policy for worse in future, then back calculations of how much money they had withdrawn will start all over again. They will also lose the excuse of hiding behind higher oil prices in future.