'IndiGo promoters have to be consistent on dividend policy'

IndiGo promoters' decision to pay themselves a hefty interim dividend ahead of the initial public offering (IPO) has raised eyebrows. More so because the payout has led to the networth of the company becoming negative temporarily.Speaking to CNBC-TV18, Deven Choksey of KR Choksey and Kapil Kaul of Centre for Asia Pacific Aviation (CAPA) feel there is nothing wrong in it considering that IndiGo has paid out similar dividends in the past.However, investors will be closely watching if the company maintains this dividend policy even after listing, they say.Also, according to Choksey, the dividend pay out could have been excessive."Of course, I think they have distributed a large sum by way of dividends. But along with the dividend, what has also gone out is the money which they had taken as MAT (minimum alternate tax) credit), and also the dividend distribution tax, which I think has ultimately gone out of the books," Choksey tells CNBC-TV18."Dividend is an earned profit, which was in the reserves. it has gone out and that is OK. But the other money has also gone out; I think that has led to the negative networth; they have dipped into the reserves," Choksey says."Out of cumulative accumulated profit of Rs 3914 crore, total amount of dividend paid is Rs 3700 crore. If you look at the MAT credit and normalise this profit of Rs 3914 crore, it turns out to be Rs 3441 crore to be very precise. The difference is Rs 260 crore, which I think has gone from the reserve itself. And if you add up the tax component on the dividend, which is around Rs 420 crore, then it sums up to around Rs 680 crore, which has gone out of the books of the company," he says.Choksey feels on an Enterprise Value/EBITDAR (operating profits), IndiGo is expensive at 8-8.25 times, compared to more established global low cost carriers like RyanAir which are available at around 6 times.At the same time, Choksey feels IndiGo can command such a valuation because its fundamentals are far stronger than any of its domestic rivals. Kaul highlights the fact that IndiGo's return on capital employed over the last five years has been consistently over 30 percent and its revenues have grown 43 percent at a compounded rate.Kaul says there is not just a "competitive difference," in fact there is a "structural difference" between Indigo and its rivals.Below is the verbatim transcript of Kapil Kaul and Deven Choksey's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: As an investor and as an expert, how would you react to this dividend policy of the promoters of Indigo? Kaul: I think it is a debatable sort of a discussion in the sense that there would be arguments towards the fact that just prior to IPO, dividends have been taken to demand that Indigo promoters have got. It could reflect some kind of issues with the prospective investors. However, by and large, they had a very consistent dividend policy. Right from the time they have been profitable, 70-80 percent of the profits are going primarily back to promoters.So, if the fact that they are aware of these issues would be raised once they hit the IPO and it reflects their confidence that going forward the sharing of dividends would continue not only for the existing promoters but the new shareholders as well and that is positive. I think we need to take a call on their dividend policy post say FY16 when they declared their dividends for this fiscal. If there is a change in dividend policy then perhaps one could raise an argument. As of now, they have taken this call, they reflect their confidence I would think. I think probably after the dividend policy is announced, once they declare their results if there is any change in the dividend policy one can basically take a call. The company’s IPO is very strong, the management is very confident of the future and the profitability for this fiscal is going to be another USD 200 million plus. So, it is a good story so far. As long as they can share this dividend with investors I think it will be positive for everyone. One has to wait and watch as to how the dividend policy will be post listing. However, if they continue to reward the investors favorably as they have done till date it will be good for the new investors who come on board. Latha: Is it a buy and are we buying it expensive? Choksey: The important aspect is about the valuation at which the company is being marketed. On the fundamental side, the company has produced relatively better numbers as far as the return on capital employed is concerned and they have been consistent with it. However, when you look at EV/EBITDA, the ratio is basically aggressively positioned at around 8-8.25 times as against other successful carriers in the global market like Ryanair or the Southwest Airlines which have been quoting at five to six times EV/EBITDA. However, I attribute this particular aggressive valuation also due to the fact that in Indian markets you don’t have too many comparable choices available as far as the investment objective is concerned in this particular space and that is where the higher amount of premium is to a greater extent justified. I would think that currently the fuel prices are low and that forms a substantial part of the ATF as we call it which is 50-52 percent kind of cost involved into the operation. As long as the fuel prices are low certainly this particular business could have the wind power to sustain further amount of profitability. So, maybe one will have to remain watchful but at the same time one could probably argue for it that given the choice availability into the market, one could possibly consider this particular stock into the portfolio. For full interview watch accompanying videos.