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

Modified: 29-Jun-20

The current article in this series provides responses related to:

  • Exide Industries Limited (SSGR and Fund Flow Analysis)
  • Companies paying out dividends instead of repaying debt

 

Exide Industries Ltd

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?

Further Reading: Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a Company

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:

Further Reading: Fund Flow Analysis: The Ultimate Guide

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

 

Companies paying out dividends instead of repaying debt

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.

Further Reading: Analysis: Omkar Speciality Chemicals Limited

Further Reading: Analysis: Granules India Limited

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.

Further Reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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