Tata Steel To JSPL Shareholders Lack Clarity On Dividend Payouts
India’s steelmakers have had two bumper years as spike in global prices drove profitability and cash flows. Yet, for shareholders, there is lack of clarity on dividend payouts.
Demand for steel surged during the pandemic but there is not enough supply to meet needs of automakers to infrastructure. That caused the benchmark domestic steel prices to more than double in the past two years, aiding what companies earn on every tonne of the alloy. Jindal Steel and Power Ltd. even announced its first dividend in eight years.
Yet, that calls into question the capital allocation policy of steelmakers. Companies use cash mostly on capex and to pare debt, and shareholders patiently wait for returns during downcycles. While steel is a cyclical business, investors do not have clarity on the extent of dividend they can expect even when profitability improves.
Barring Tata Steel Ltd., dividend payouts have not been consistent for three of India's four largest steelmakers.
Metal companies should have a dividend policy that is aligned to their profitability, Amit Tandon, founder and managing director of Institutional Investor Advisory Services, a proxy advisory firm, told BloombergQuint. “The profitability of these companies has risen in the last two years but increase in dividends have not been commensurate.”
Here's what top Indian steelmakers say in their capital allocation policies:
According to its investor presentation, the company has a "progressive dividend policy" of rewarding shareholders after retaining sufficient funds for growth.
It offers no clarity on what percentage of profits or cash flows can be shared with investors. And it does not mention criteria to pay dividends in a given year.
To be sure, the Tata Group company has had most consistent payouts in the last five years.
India's largest steelmaker has among the most comprehensive policy among peers.
The document says it looks at "balancing rewarding shareholders through dividends and retaining profits to fund the growth of business".
The company aims to maintain a dividend payout of 15-20% of the consolidated net profits of the company after tax in any financial year. Shareholders may not expect dividend in the event of loss or inadequacy of profit; adverse market conditions or regulatory constraints; proposal of buyback of shares; need to conserve reserves in view of the proposed large capital allocation for expansion and M&A activities, the policy says.
In response to BloombergQuint's queries, Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel, said over the phone that the company has not focused on using cash flows to cut debt but to add volumes. That, in turn, can generate more earnings, he said.
Rao said JSW Steel paid dividend of around 15% of net profit for FY17-20, and at the higher end of the band in FY21, he said. For the upcoming financial year, he expects to maintain a similar range.
JSW Steel, according to Rao, is conscious about ratios, does not take much risk and consistently rewards shareholders. This financial year, despite the expansion plans, the dividend policy would remain consistent as debt on its books is at comfortable levels, said Rao.
The company's payout policy says shareholders "should not expect dividend in case of loss or inadequacy of profit, need for substantial funds for capital expenditure requirement; prudence to reduce debt levels".
It does not spell out what it means by "inadequacy" of profit or "substantial funds". Beyond the vague riders, there is no mention of what percentage of profits or cash flows can be shared.
Responding to BloombergQuint's queries, a company spokesperson said JSPL wants to maintain a consistent dividend payout after having distributed interim dividend after eight years.
Dividend is subject to net profit earned and cash generated by the company during the financial year, present and future capital requirement of capex and retention of sufficient profits for further deleveraging, according to the state-owned steelmaker's policy.
Like others, it also fails to mention a specific range of profits to be distributed among shareholders.
Globally, Nippon Steel Corp. has a better laid-out policy among peers. The company targets dividend payout of around 30% of consolidated profit. Nippon cites capital requirements for investments to raise corporate value, performance forecast, and consolidated and non-consolidated balance sheets as factors to consider for paying dividend. But it does not explain them in detail.
ArcelorMittal SA, the world's biggest steelmaker, also has a plan that's short on specifics. The company's new dividend policy "combines a progressive annual base dividend with a variable component that is linked to the free cash flow of the business", according to its disclosures. It does not define fixed and variable components.
JN Gupta, founder and managing director of Stakeholder Empowerment Services, a shareholder advisory firm, does not want to impose requirement of seeking higher dividend.
“We believe (Indian) companies should have objective dividend policy that articulates how much of their profits are distributed as dividend,” he told BloombergQuint. “Have seen only a few companies having an objective across top 500 companies,” he said, adding one sector can't be singled out as good or bad.
To be sure, the changed fortunes of steelmakers reflect in their stock prices. JSPL has led with sixfold gains in the last two years, while Tata Steel and JSW Steel have surged over fourfold. SAIL, with least gains, is still up nearly fourfold.
Yet, barring JSW Steel, its peers are trading at a discount against five-year enterprise value-to-Ebitda multiple.
According to Ritesh Shah, head of mid-market coverage and ESG, and materials analyst at Investec Securities, metal companies despite generating strong free cash have been trading at steep discounts, partly on the back of ESG concerns and lack of formal capital allocation framework.
A "well-crystallised" capital allocation framework, including target leverage ratios, is required along with consistent implementation, Shah said in an emailed response to BloombergQuint. “We haven’t seen this yet.”
Announcing the right capital allocation framework with cash earmarked for growth, deleveraging and dividends along with target leverage ratios "could do wonders" for trading multiples of the sector, he said.
Steel Vs Rest
Cash flow utilisation of the metals sector comprises three types of spending: dividend, capex, and net debt reduction.
India’s top four steelmakers paid only 5% of the total operational cash flows as dividends, much lower than their non-ferrous counterparts, according to BloombergQuint’s analysis of numbers since fiscal 2017.
The non-ferrous industry has a much better focus towards rewarding shareholders. Hindalco Industries Ltd., for one, also has a clearly defined policy.
The Aditya Birla Group company recently unveiled capital allocation plan that focuses on expansion after significantly deleveraging its balance sheet. After meeting normal working capital requirement, it intends to use about 75% of cash towards growth capex, 15% for debt reduction, and 8-10% for shareholder returns, according to the policy.
In all, top non-ferrous metals companies have used 49% of the operational cash for paying dividends since fiscal FY17.
A clearly laid-out dividend policy for shareholders becomes even more compelling as the fundamentals of both ferrous and non-ferrous companies improve.
None of the metal companies, barring one, has rewarded shareholders through buybacks.
The exception being state-owned National Aluminum Co. that declared a Rs 749-crore share repurchase offer in January. This came at a premium of a little over 10% to the prevailing closing price.