June 9, 2017

Q&A: Exide Industries, SSGR, Dividend Payment vs Debt Repayment

www.drvijaymalik.com has a section dedicated to answering queries of readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. I have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to:
  • Exide Industries Limited (SSGR and Fund Flow Analysis)
  • Determining the duration of historical data to be analysed for stock analysis
  • Companies paying out dividends instead of repaying debt
  • Self-sustainable growth rate (SSGR)

Queries on Exide Industries Limited, dividend payment vs debt repayment, self-sustainable growth rate, SSGR, history of data to be analysed


Query


I did this study for Exide Industries Limited and I found that the Self Sustainable Growth Rate (SSGR) is almost equal to past sales growth. And yet the debt doubled last year. What justification can be given for that?


Since the inventory turnover has increased and also debtors turnover is stable the cash locked in working capital, we can say that working capital has been stable. And if you look at last 10 years capex (₹2682.35 cr) has been equal to free cash flow (FCF) of ₹2648.99 cr.

Can you please provide me with a gist of your calculation for Exide Industries Limited, so that I can confirm my learning's?

Regards,

Author’s Response:

Hi,

Thanks for writing to us and sharing your views on Exide Industries Limited

Self-Sustainable Growth Rate (SSGR) is a tool, which tells us about long-term trends. We use the data of 3 years average of all the inputs, which are used to calculate SSGR. For assessing the reasons for debt increase for one year, we recommend using Fund Flow Analysis as described in the following article:


Fund flow analysis will reveal the reasons for debt increase and where the funds got utilized.

Analysis of SSGR for Exide Industries Limited indicates that the company is growing in line with what its business model affords.

Further, the analysis of CFO and FCF indicates that the company has been able to meet entire capex requirements from its CFO and thereby has generated positive FCF.

The company has reduced its debt from ₹342 cr. in 2007 to ₹114 cr. in 2016 and has simultaneously paid dividends of about ₹1,125 cr. over last 10 years.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Hello Doctor,

I have customized my excel sheet by calculating 5yrs free cash flows (FCF), 5yrs operating cash flow, 5yrs NPAT.

I want to know that if I do not take CFO and Capex of last ten years, then will it make any difference to my results.

Also, I have calculated FCF for one year.

Will my process of calculating results only for 5 years instead of 10 years as yours distort the results for interpretation?

The reason for doing the above things is that I came to know during my analysis that in Screener the data for before 2012 was not matching for some of the companies. Please tell me if I am doing something wrong?

Regards, 

Author’s Response:

Hi,

Thanks for writing to us!

The length of the time for which an investor should analyse the data is a personal preference of the investor. An investor may choose the timeline for which she is comfortable.

We prefer to analyse the data for the longest possible time for which it is available. Past financial data of 10 years is readily available in downloadable Excel format from different sources. Therefore, we use analysis of 10 years of data for any company which we assess.


The results and conclusions may differ with changing the time frame of the data.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Hi Vijay,

Your website has been a great source of learning and a guiding light for small retail investors like me. Thank you for the great work.

Across your analysis of various companies (Omkar Speciality Chemicals Limited, Granules India Limited, etc.) and few more which I track personally (e.g.: Shemaroo), it is a common observation as to how companies instead of paying off their debt continue to pay dividends.



I have a couple of follow-up questions -
  1. Why do companies pay dividends rather than try to lower their debt? Except to please shareholders I can't think of any other reason. Am I missing out anything?
  2. Is it worth investing in companies who pay me dividend either by raising equity or raising debt? Is there any positive angle to it which I am not able to follow?

Looking forward to your thoughts.

Thanks,

Author’s Response:

Hi,

Thanks for your feedback! We are happy that you found the articles useful!

Another aspect apart from the reasons mentioned by you, which needs to be looked at is that dividends are an important source of income for the majority shareholders primarily the promoters.

We advise investors not to take any comfort of the dividend yield of the companies, which fund their dividends from debt or equity dilution.


Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Hi Vijay,

I am excited reading your book "peaceful Investing". While reading through the section the SSGR section (page# 63),


For the SSGR calculation examples provided for 'FDC Limited' and 'Container Corporation of India Limited', is the value 'dividend payout' adjusted for the tax on the dividend?

It was my assumption that the value is adjusted for tax on dividend since the dividend paid for a particular year in the annual report is different from the value specified in the pdf and if I subtract the tax on dividend I get the same value as in the pdf.

Can you please explain why we need to subtract the tax on dividend from the dividend paid? Please forgive me if my assumptions and calculations are totally wrong.

Hope you see my simple query and give a word on it.

Thanks

Author’s Response:

Hi,

The best thing about finance is that we may experiment with different ratios by tweaking the parameters as per our preferences.

Factoring in dividend distribution tax may have provided the investor with the value of retained earnings, which remain in the hands of the company for reinvesting after meeting all the statutory taxation obligations.

We advise investors to keep on changing the parameters of any ratio as per their preference and therefore come up with their own version of ratios, which they feel comfortable with.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik 

P.S:

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  • We use a customized stock analysis excel template which is now compatible with screener.in. This customized excel template is now available for download as a premium feature. For further details and download: Click Here
  • You may learn more about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
  • You may read more company analyses based on our stock investing approach in the Company Analysis e-book series, which is spread across multiple volumes: Click Here
  • I have used the financial data provided by screener.in and the annual reports of the companies mentioned above while conducting analysis for this article.



DISCLAIMER


Registration Status with SEBI:

I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:

Currently, I do not own stocks of any of the companies discussed above