Hemvara Utilities pays out 90% of its profit as dividends while free cash flow is only 70% of profit. How is the gap funded, and is the dividend safe?

The Rs 200 crore gap is borrowed, so the dividend is safe for now but not sustainable at a 90% payout. Over five years the gap adds about Rs 1,012 crore of debt, and with profit flat, net debt to EBITDA rises from 2.5x to about 3.0x. Interest on the new debt also trims profit, widening the gap. A payout near 70%, matching free cash flow, would stop the drift unless the extra capex is lifting future profit.

A family that earns Rs 1 lakh a month but spends Rs 30,000 on a home loan instalment has Rs 70,000 to spend. If it spends Rs 90,000, the extra Rs 20,000 goes on a credit card, and the card balance grows every month. A dividend is paid in cash, so the ceiling on a sustainable dividend is free cash flowCash from operations less capital spending: the cash left over that could be paid to shareholders or used to repay debt., not profit. Hemvara spends Rs 300 crore of its profit on capex above depreciation, leaving Rs 700 crore, and pays out Rs 900 crore.

Each year about Rs 200 crore is added to debt. That debt costs 8%, or 6% after tax, so profit falls a little, which lowers free cash flow by the same amount while the dividend falls by only 90% of it. The gap widens slowly, and over five years Hemvara borrows about Rs 1,012 crore to pay dividends, taking leverage from 2.5x to about 3.01x. Nothing breaks in year one, which is why the problem is easy to miss.

Safe this year, not safe as a policy. The one question that decides it is whether the capex above depreciation is building assets that will raise profit. For a gas distributor laying pipes into new towns, borrowing part of the cost is normal, and profit should rise as the new towns connect; then leverage can hold steady. Hemvara's profit has been flat for three years, which suggests the capex is keeping the network running, not growing it. In that case the payout has to come down towards 70%, and a research note should say so before the board does.