After a good run in 2014, the Indian stock market lost steam and turned volatile in 2015. Expectations of big-bang reforms that led the 2014 rally soon gave way to a downturn. 

While the market capitalisation of NSE-listed companies has slipped 2 per cent in the last one year, investors in a few companies were hit far harder. JP Associates, for instance, has lost an eye-watering 63 per cent in market capitalisation, while GVK Power & Infrastructure lost about 40 per cent. The market capitalisation of Adani Power, Lanco Infratech and JP Power Ventures has eroded by over a third in the last one year. All these companies are highly indebted.  India Inc’s debt woes are back in focus again.

Recently, the Centre announced a bailout package for struggling State-owned electricity distribution companies (discoms), which will involve the respective States taking over 75 per cent of the discoms’ debt. This is expected to reduce the stress on the balance sheets of banks that have loaned large amounts to ailing utilities.

In the infrastructure space, indebted companies are seeking lenders’ nod to refinance their loans under the RBI’s new 5:25 scheme. Under this scheme, banks can stretch the debt repayment schedule to 25 years, thus easing the cash flow pressure on companies.

The fact that debt-ridden companies are queuing up to make use of this scheme is indicative of their financial stress.

Leading banks, including private ones, have reported higher defaults in the latest September quarter. While recent reports point to the grim debt situation within corporate India, these are only anecdotal evidences. To dig deeper and find out how things have changed, particularly in the last two years — when companies started to cut back on their capex and aggressively prune their debt — we sifted through the data for 966 NSE-listed companies (having comparable data for five years, excluding banks and financials).

Here are six interesting trends that our analysis threw up.

Debt accumulation slows down Let us begin with some encouraging statistics. After a sharp rise in debt levels, particularly between 2007-08 and 2011-12, sanity appears to have returned, with the pace of growth in debt moderating substantially in 2014-15.

Between 2008 and 2012, when Indian companies had lined up aggressive capex plans, total debt grew 23 per cent annually. Even after moderating from such high levels, debt grew 16 per cent annually till 2013-14. But as of March 2015, the growth in total debt of NSE-listed companies has fallen to 5.8 per cent.

Efforts by India Inc to reduce debt and cut back on its investments appear to be paying off to some extent. After outpacing the growth in assets in most years since 2008, the increase in debt has also been commensurate with the growth in assets last fiscal. Assets for the NSE-listed companies grew 5.6 per cent in 2014-15.

This is in stark contrast to the trend seen in earlier years, when companies took on significant loans with the intention of ramping up capacities, but were unable to do so. Until 2013-14, the long-term debt of 966 NSE-listed companies had soared, growing about 30 per cent annually. But fixed assets of these companies — for which debt was raised in the first place — grew just 15 per cent.

Weak demand plays spoilsport The good news for Indian companies ends with the slower pace of growth in debt. The picture gets gloomy thereafter. It is true that with debt levels growing modestly, the rise in interest costs has moderated too. Over the last five years, interest costs shot up 24 per cent annually for 966 NSE-listed companies. In 2014-15, it grew just 9 per cent. But savings on interest costs have failed to translate into better earnings, owing to weak demand. Sales for India Inc were flat in 2014-15, and this overshadowed the benefits of lower raw material and interest costs.

India Inc is in a typical chicken-and-egg situation. While cutting back on investments has helped companies reduce debt, the fallout of this has been weak economic activity. In 2014-15, earnings of all NSE-listed companies put together slipped 8 per cent compared to the previous year. The interest cover — the ability of a company to service its interest payments — has thus fallen from 3.5 times two years ago (six times in 2009-10) to 2.75 times in 2014-15. If we look at the data for NSE companies that have declared their September quarter results so far, the financial performance still appears dodgy. While lower interest rates following the RBI’s aggressive money easing stance should help lower the interest burden for companies, it may not boost earnings in the near term. Moreover, lending rates have moved down only by about half a percentage point which, in itself, is not a game changer.

The good get better, the bad turn worse Over the last two years, companies with low leverage (debt equity <1) have managed to hold on well. The interest cover for such companies has held steady at 6.8 times over the last two years.

About half the 966 NSE listed companies had a debt equity ratio of less than one in 2012-13. A similar number of companies had a low leverage in 2014-15. The flat earnings for such companies in the FY15 fiscal was a tad better than the 8 per cent fall in earnings for all NSE listed companies put together.

But companies that are saddled with huge debt have not had it easy. The prolonged slowdown, particularly in the last two years, has impacted their cash flows and interest paying ability.

The interest cover for companies with debt equity ratio of over one slipped from 1.9 times two years ago to about 1.5 times in 2014-15. For companies with debt equity of over three times, the situation is far worse. From an already low cover of 0.9 times (just about meeting interest payments) in 2012-13, interest cover fell to a precarious 0.5 times in 2014-15.

The problem has also gotten larger in size with more number of companies’ debt-equity ratio rising to over three and five times in the last two years.

In 2012-13, the number of companies that had debt-equity ratio of more than three was 69 (of the 966 NSE-listed companies).

This number rose to 85 in fiscal FY15. Similarly, the number of companies with debt equity of over five is 50 per cent more than that seen two years ago.

If the recent concerns over InterGlobe Aviation’s negative networth (owing to large payout of interim dividend to promoters) caught your attention, then there are many other listed companies whose net worth has slipped into negative territory. And this is not because the promoters decided to help themselves to a large dividend.

Of the 966 NSE listed companies, 68 have negative net worth as of 2014-15. Prominent among these are Suzlon Energy, Jet Airways and Lanco Infratech, all of which are high-debt companies. Five years ago, there was not a single company with negative net worth within the NSE-listed space!

Sector-specific issues While the rise in interest costs for all NSE-listed companies has moderated, a few sectors are plagued by a steep increase in interest payments.

It is common knowledge that the debt woes for infrastructure, power, iron and steel, mining and textiles run deeper than in other sectors.

Some of the policy reforms in these troubled sectors, while under way, have a long way to go before they start yielding results.

The power sector has been facing multiple challenges in terms of fuel availability and project clearances. While the recent revival package will bring respite to the financially stressed discoms, timely tariff hikes and reduction in transmission and distribution losses will be essential to see a structural improvement.

For now, debt woes continue to plague the sector. The overall debt-equity ratio for the sector has gone up to 1.7 times in 2014-15 from 1.4 times two years ago. Interest cover has shrunk from 2.8 times to 1.8 times now. Interest costs continue to rise, growing 23 per cent in 2014-15.

Steel is another sector that has been beset with issues stemming from difficulties in land acquisition, delayed environmental clearances, and meltdown in global commodity prices. Interest cost for the sector continued to rise in 2014-15, growing 24 per cent.

Owing to flat sales and higher costs, the sector moved into the red in 2014-15, with leading players, such as Tata Steel and Bhushan Steel, reporting losses for the year.

In the construction and infra space, while the growth in debt has moderated substantially from 25 per cent annually in the last five years to 8 per cent in 2014-15, earnings shrank over 70 per cent on weak demand. As these companies battle to pay off their existing debt obligations, a quick turnaround in most of them is unlikely.

Some industrials do better While the overall picture for India Inc may still look gloomy, there are a few bright spots. Sectors such as Pharma, IT and FMCG have always maintained very low leverage — most companies are cash rich and generate robust returns. But there are other industrial sectors as well that have managed to tide over the slowdown.

Consider auto, for instance. While the slowdown in the economy impacted sales, most companies have managed to maintain a healthy interest cover. For auto players, FY15 was a mixed bag.

While tepid volume growth in the motorcycle segment and a decline in tractor sales impacted the performance of companies such as Bajaj Auto, Hero MotoCorp, and M&M, a strong recovery in PV sales and market share gains drove the strong performance by Maruti Suzuki. Ashok Leyland too, benefited from a recovery in medium and heavy commercial vehicle sales. Lower raw material prices have also helped most players on the margin front.

While auto components supplier Amtek Auto has been in trouble owing to the inability to service its debt, the sector as a whole appears to be on a sound footing.

Barring a handful (nine of the 48), that have an interest cover of less than one, the overall debt-equity (at 0.4 times) and interest cover (5.6 times) for the sector remain healthy. Sales and earnings growth for the sector have been in the range of 12-13 per cent in 2014-15.

It’s a sale alright! As evident from the data presented above, for many Indian companies, debt troubles are far from over, exacerbated further by weak demand and falling commodity prices.

In the past year, asset sales have emerged as a quick-fix solution to corporate India’s debt woes. In theory, such sales can help companies liquidate their assets and repay some of their debt.

But surprisingly, despite asset sales, many large corporates still carry enormous debt on their balance sheets that has only grown (rather than shrink) after the assets sales!

Preposterous as it sounds, that has been the case with many companies in the infra and power sector, which continue to witness delays in the completion of existing projects.

And hence they are forced to take on more debt, not for capex but just to fund operational losses on these projects.

Take Jaiprakash Power Ventures, for instance. The company sold two hydro plants of 1,391 MW capacity for about ₹9,700 crore in 2014-15. While part of the amount raised through sale of assets has been used to repay debt, the total debt for the company has still gone up by 11 per cent in 2014-15.

What is of even greater concern is that the company appears to have sold off its more promising assets.

According to the latest annual report, the two plants sold contributed 59 per cent of the company’s total operating profit before interest and tax. In fact, the remaining operations (post-sale) are loss-making at the PAT level and carry the chunk — 60 per cent — of the interest cost.

Lanco Infratech is another company that sold a portion of its assets recently in a bid to reduce its debt. The company sold its Udupi power plant to Adani Power at an enterprise value of ₹6,300 crore. While the sale helped the company reduce its debt to some extent, it has also meant lower earnings for the company. This is because the Udupi project contributed over 60 per cent to the company’s overall EBITDA in 2014-15, according to the annual report.

There are many such companies, particularly in the infra and power sector, that have sold their core earnings assets to reduce debt.

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