India Inc seems to have embarked on deleveraging (reducing debt) in right earnest, with about 60 of the 200 corporates that have announced their financial results so far reporting an aggregate debt reduction of ₹6,862 crore in FY2016.
State Bank of India’s Economic & Statistical Department in its report ‘Ecowrap’ said, “Clearly, things are now looking better, contrary to popular perception. Cement, Finance, Packaging, Transport (Airlines) and Fertiliser are some sectors that appear to be repaying debt or are less dependent on resorting to debt.”
Interestingly, sectors such as fertiliser which is now witnessing a silent revolution as the new investor policy is encouraging setting up of gas-based urea plants in country – the first time in the last 25 years.
The SBI report said in the listed companies data, three finance companies — Shriram Transport Finance, Cholamandalam Investment Finance and Motilal Oswal Finance — are reporting lower overall debt levels in FY16.
In the fertiliser sector, companies such as GNFC turned the corner (from loss to profit in FY16).
In this sector, the SBI report said that already three plants are being set up in Kota (Chambal Fertilisers), Ramagundam (EIL and National Fertilisers Ltd) and RCF.
“Additionally, with an aim to encourage setting up urea-based plants in eastern part of the country, the government has directed NTPC, Coal India and ONGC to help set up plants at Sindhri, Gorakhpur and Barauni for facilitating Jagdishpur to Haldia gas pipeline being laid by GAIL,” it added.
The report observed that cement major UltraTech Cement Ltd reported lower overall debt levels, especially in long term borrowings.
However, UltraTech Cement entering into a definitive agreement to acquire the cement division of Jaiprakash Associates Ltd, analysts may watch the funding mix adopted for this acquisition.
Maruti Suzuki (Passenger Cars) also appeared to trend at lower debt levels.
In packaging, Essel Propack has consistently brought down debt levels in the last four years or so, said the report.
In a speech last year, SS Mundra, RBI Deputy Governor, observed that excessive leverage run up by the Indian corporate is a matter of great concern.
“Overleveraging is like having blood pressure — too low or too high, both are detrimental to the health.
“While banks need to do proper due diligence taking into account a consolidated balance sheet of the group, on their part the borrowers and the large business houses must end over-reliance on borrowed funds for achieving extraordinary growth rates.
“Operating with too little equity in the enterprise is like treading on thin ice.
“Too much leverage dilutes promoter’s responsibility and has implications for banks’ ability to recover loans,” he said.