BackWhy did Vedanta double its dividend payout?
Higher Hindustan Zinc dividend, cash flows triggers, says firm even as analysts say payout may service parent firm's debt
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Mumbai: Vedanta Ltd’s decision to nearly double its interim dividend in a quarter which witnessed a 40% fall in net profit has raised questions from analysts.
While all shareholders gain from the higher dividend, some analysts wonder whether the generosity is linked to parent firm Vedanta Resources Plc.’s strained cash flows. A higher payout benefits all investors, including the promoters—in this case Vedanta Resources.
On Wednesday, Vedanta, which straddles mining and oil and gas sectors, reported a net profit of ₹ 973.97 crore for the September quarter against ₹ 1,639.93 crore a year ago. Revenue fell 15% to ₹ 16,561 crore, compared with ₹ 19,549 crore a year ago.
However, the interim dividend more than doubled to ₹ 3.50 per share from last year’s ₹ 1.75 per share. In the September 2014 quarter, Vedanta had reported a 15% year-on-year increase in net profit. The interim dividend is for the April-September period.
Mehul Sukkawala, senior director, corporate and infrastructure ratings, Asia Pacific and team leader, South Asia Corporate Ratings at Standard and Poor’s Ratings Services (S&P’s) feels the parent company could be in need of money.
“As you might have seen in our recent ratings action on Vedanta Resources, its financial position is quite weak and its avenues of cash flows are restricted to two main sources—its copper mining operations in Zambia and dividend payment from Vedanta Ltd. Therefore, a strong cash flow from the dividend of Vedanta is important for the parent firm" Sukkawala said.
As of 31 March, parent firm Vedanta Resources had a gross debt of $18.5 billion, including interest bearing payables of $1.7 billion, said Sukkawala. Its net debt was at $8.46 billion as on March 2015.
On 20 October, S&P’s downgraded the foreign currency long-term corporate credit rating of Vedanta Resources with a negative outlook, citing expectations of a weak financial performance over the next 12-18 months.
When analysts posed the question to the management at the post-earnings conference call, the company attributed this to the jump in dividend payout from its subsidiary Hindustan Zinc Ltd (HZL), which performed well during the quarter ended September 2015.
“We have seen that there is an increased dividend flow from Hindustan Zinc. They have declared a special interim dividend during this period. So, because of that, there’s an additional inflow of funds at the company," said D.D. Jalan, whole-time director and chief financial officer of Vedanta Ltd, during the conference call.
In an email response, a Vedanta Ltd spokesperson added, “For Q2FY16, our diversified asset portfolio has delivered a strong operating performance and resulted in strong free cash flows of ₹ 7,145 crore during the quarter, a significant rise compared with Q2FY15. Our objective at each business is to optimize production and generate strong cash flows. We are very focused on de-leveraging. We have been lowering our debt. At the Q1 result in the end of July, we stated that we expect our half-year net debt to be much lower. We have been able to reduce our net debt by over ₹ 5,335 crore in Q2."
The spokesperson further said a healthy cash flow and an increase in the interim dividend by Hindustan Zinc are the main triggers that have led to the payout to shareholders.
The capital allocation process is essential to balance between the return to the shareholders as well as de-leverage the balance sheet and to allocate the funds for the growth of the business. “The directors have decided that it will be optimum to enhance the interim dividend by 100% as compared to what it was for last year interim. It is a positive outcome in delivering superior returns for our shareholders," the spokesperson said.
Analysts were not entirely convinced with the explanation.
“There are no cash flows for the London-listed parent company apart from the copper mines in Zambia and Vedanta Ltd. ICDs (inter-corporate deposits, a form of unsecured loan within group companies) are also difficult to source as a company requires permission of minority shareholders. Since the cash flows from the mines in Zambia are not so healthy now, dividend is the only way out to service the parent’s debt," said a metal analyst at a domestic brokerage house, who declined to be identified due to company policy.
Due to the doubling of interim dividend, Vedanta Ltd paid ₹ 706 crore to its parent Vedanta Resources Plc, according to Bloomberg data. Institutional investors got ₹ 121 crore, while retail investors got ₹ 359 crore.
Shriram Subramanian, managing director of InGovern Research Services, a proxy advisory firm, compared the dividend payout with the case of InterGlobe Aviation Ltd, which announced a large dividend just before it went public. InterGlobe operates IndiGo, India’s largest airline.
“It is difficult to say what was the motivation of the company but it is just like what IndiGo did. The dividend it paid was largely because it wanted to benefit the promoters," said Subramanian.
He, however, said that while a higher dividend indicates that the company is “socializing its debt", one has to also remember that retail shareholders are also benefiting.
“Payment of dividend is the prerogative of the management and one cannot question it on the grounds of law or governance. But one can always question it on the grounds of prudence," said J.N. Gupta of Stakeholder Empowerment Services.
Another explanation for the higher dividend could be better free cash flows during the quarter.
Vedanta Ltd’s free cash flows (profit from operations minus capital expenditure) improved to ₹ 7,145 crore, an increase of 125% when compared with the same period last fiscal.
This is partly because of improved earnings from the zinc business and also because of a cut in capex announced earlier this year.
For the current fiscal, the company has cut capex to $500 million from $1.9 billion in 2014-15.
A day after announcing the dividend, Vedanta Ltd shares rose 0.19% to ₹ 105.05 on 28 October, but fell by 6.41% to ₹ 100 after close of trading hours on Friday. Since the beginning of the fiscal year, Vedanta Ltd shares have fallen by 47.2% so far.
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