Indian blue-chip companies turn to debt to pay dividends

Top Indian companies are taking on more debt to pay dividends to their shareholders, analysts have warned, highlighting a trend that is weakening corporate balance sheets at a challenging time for the country's economy.

During the financial year to March 31, 2013, 57 of the 500 biggest companies listed on the BSE borrowed a total of Rs 19,170 crore ($3.5bn) to fund dividend payments, according to a study that India Ratings and Research published on May 23. India Ratings is the local arm of Fitch Ratings.

Another Rs 18,000-Rs 200,00 crore of debt is likely to have been channelled to shareholders in financial year 2014, far higher than the Rs 4,000-Rs 7,000 crore in the previous four financial years, the study has found.
 

The dividend payments show that Indian companies remain determined to look after their shareholders even as a slowing economy puts pressure on free cash flows. However, taking on additional debt to pay shareholders becomes potentially dangerous when a company is already highly leveraged, analysts said.

Of the 57 companies that borrowed in the past financial year to pay dividends, 14 have net debt equal to more than 5x their earnings before interest, tax, depreciation and amortisation, according to India Ratings. A ratio of over 5x typically indicates a highly leveraged company.

India Ratings did not name the companies. However, an analysis of public filings reveals property developer DLF kept its dividend flat at Rs 2 a share in FY13, despite a 40 per cent fall in profit after tax and negative cash flow from operations. DLF's leverage ratio also increased to 5.8x Ebitda, up from 5.2x at the end of 2012, according to analysts.

Larsen & Toubro paid a higher dividend in 2013, even though analysts said the company's net debt to Ebitda increased to 5.1x from 4.5x. Its cash flow was also negative.

Aluminium producer Hindalco shrank its total dividend payout but returned 18.5 per cent of profits to shareholders, up from 15.4 per cent the previous year and its highest payout rate since at least 2006, according to company data.

Hindalco's leverage increased to 5.9x at the end of fiscal 2013 from 4.2x 12 months earlier, analysts said.