Decoding negative net worth: IndiGo paid about 80% of its profit as dividend to promoters

New Delhi - India's largest airline by passengers and also its most profitable is launching an initial public offer early next week.

IndiGo has seen exponential growth in the last few years, thanks to its stubbornness in following the low-cost carrier (LCC) model diligently. This means it has stuck to single aircraft type, low fares and avoided frills like airport lounges and complimentary meals on board.

IndiGo's success with financials has come when peers have mostly been floundering due to hazy business models and a high taxation environment which makes operating conditions quite challenging for most other airlines.

Decoding negative net worth: IndiGo paid about 80% of its profit as dividend to promoters


Not only did IndiGo report record profits for FY15, it has repeated its stellar performance in the first quarter of the current fiscal. As per the red herring prospectus the airline has filed over the weekend, IndiGo posted record net profit at Rs 640.43 crore for the three months ended June 30th, 2015 on total revenue of Rs 4317.19 crore.

But here's the dampner: the airline says it has turned networth negative during the quarter. "Our company has a negative net worth of Rs 139.39 crore as at June 30, 2015. If this financial position continues, it may 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 be able to achieve a positive net worth in periods going forward," the RHP says while listing out the risks to investors.

Why did the net liabilities of an airline, which continues to have a strong financial performance, exceed its net assets?

This could be due to large dividend payouts to promoters. In FY15, just months before it announced its intention to go public, the airline gave away close to three times the dividend it had offered to promoters in FY14.

According to the RHP, Rs 1079.668 crore was given away as dividends in FY15 against just Rs 377.58 crore in FY14. And now, the RHP says IndiGo has declared interim dividend of Rs 1009.2 crore for the current fiscal.

Lets look at the dividend payouts as percentage of net profits it declared in the last two full financials years. In FY14, the airline's net profit was Rs 474.44 crore. This means roughly 80% of the net profit was paid as dividends to its promoters. In the next fiscal, the RHP says IndiGo declared a net profit of Rs 1,295.58 crore so about 83% of the net profit was paid as dividends.

Market experts believe IndiGo has done nothing new or wrong in giving away hefty dividends to promoters since it has made full disclosures in the prospectus leading up to the IPO. But this has obviously affected the airline's networth.

The second interesting fact one can gather from the RHP is as of June 30, the airline had Rs 3,912.375 crore debt on its books, down slightly from Rs 3926.16 crore at the end of fiscal 2015.

"All of our indebtedness is aircraft related and we did not have any working-capital-related indebtedness," the airline asserts but with a negative networth and with a large fleet expansion plan lined up, indebtedness could well increase going forward.

While listing the risk factors, it says levels of indebtedness could adversely affect business. "Further, we may incur a significant amount of debt in the future to finance the acquisition of aircraft and our expansion plans. We have agreed to purchase a total of 430 Airbus A320neo aircraft as per fixed aircraft delivery schedules under our 2011 and 2015 purchase agreements with Airbus."

IndiGo generally assigns its right to purchase each aircraft under a purchase agreements with Airbus to a third-party lessor and leases the aircraft from the lessor. Third-party lessors are typically required to pay the agreed purchase price between the lessor and IndiGo for each delivered aircraft directly to Airbus.

"If we are unable to assign our right to purchase under our purchase agreements with Airbus to a third-party lessor or if such third-party lessor defaults in purchasing the aircraft from Airbus, we may have to incur a significant amount of debt to finance the acquisition of the aircraft. As expanding our fleet size is crucial for implementing our growth strategy, any failure to obtain acquisition financing may adversely impact our business," the airline says in its RHP.

So the risk is there can be no assurance that IndiGo will be able to raise such financing in time, on acceptable terms or at all.

Also, the RHP says IndiGo has fixed the employee reservation portion in the public issue as 32,00,000 equity shares and employee discount has been fixed at 10%.

Besides, it says grant of stock options under employee stock option schemes will result in a change in profit/loss.

"We intend to grant eligible employees 3,107,674 options under our employee stock option scheme, the InterGlobe Aviation Limited Employees Stock Option Scheme – 2015 (“ESOS 2015 – II”). The Compensation Committee by its resolution dated October 6, 2015 has proposed the approval of the grant of up to 2,528,928 options at the Issue Price and up to 578,746 options at the face value of the equity shares of the Company (Rs 10). Each of these grants shall be made on the Pricing Date," the RHP says.

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Updated Date: Oct 20, 2015 08:24:34 IST

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