Rewarding Shareholders May Add To Debt Pile Of Indian Oil 

Indian Oil Corporation Ltd. announced its biggest-ever payout to shareholders in at least 17 years at a time the government, its promoter, is looking to mop up funds to meet its divestment target. But that may add to the debt pile of India’s largest oil refiner.

It announced a dividend and a first-ever buyback in its board meet today, according to an exchange filing. That would cost the company nearly Rs 12,321 crore, the most it will spend to reward shareholders since at least 2001. The company will buy back shares at Rs 149 apiece, a premium of 9 percent over the previous close. It also announced a dividend of Rs 6.75 per share.

Of the total amount announced, the government will get close to Rs 5,942 crore and a dividend distribution tax—imposed by the government on companies as per the dividend paid to investors—of Rs 1,331 crore, according to BloombergQuint’s calculations. That will help it get closer to its Rs 80,000-crore divestment target for 2018-19—the government has collected Rs 54,000 crore so far this year.

But the payout may entirely wipe out the company’s cash balance, raising total debt in the ongoing financial year, BloombergQuint’s calculations showed.

Indian Oil had a cash balance of close to Rs 10,000 crore and a total debt of more than Rs 59,000 crore as of Sept. 30. On an average in the last 10 years, the company also generated a negative free cash flow—indicating its inability to generate enough cash to support business—of more than Rs 2,100 crore.

Yet, Vivek Jain, director of India Ratings, said the company’s total debt-to-earnings before interest, tax, depreciation and amortisation ratio won’t get affected.

“Higher dividend payouts and buyback could force the company to add debt for its expenses, but the leverage profile is likely to remain comfortable,” Jain said. “As the capex is being spent towards capacity expansion, upgradation, entering new areas and expanding marketing reach, the Ebitda is likely to flow over a period of time.”

To be sure, India Ratings has an ‘IND AAA’ rating on the company, implying the highest degree of safety.

Indian Oil has a leverage ratio of close to 1.4 times, which may increase to at least two times by March 2019, according to BloombergQuint’s calculations.

Valuations To Improve

Indian Oil’s earnings per share and return-on-equity may improve and there can be a structural re-rating, Nomura had said in a report on public-sector buybacks.

Most of the listed public sector companies in India trade at a discount due to poor capital allocation practices as they use the accumulated cash either for unproductive or poorly planned capex, including acquisitions, on behalf of the government, the brokerage said.