CLEANER BALANCE SHEETS. Less indebted India Inc

India Inc’s debt woes that have been in focus in the last couple of years have not only led to sharp cutback on capex, impacting the overall investment activity in the economy, but have also hit banks’ earnings. The reduced ability of companies to service debt has led to steep rise in loan delinquencies for banks.

But is the tide gradually turning for India Inc and banks? Sifting through the data for 877 listed companies certainly reveals some encouraging statistics. The period between 2008 and 2012 saw a sharp rise in debt levels (23 per cent annually), as companies went aggressive on their capex plans. But in the last two years, debt of Indian companies has grown at a far modest pace. In 2014-15, debt grew by a much lower 7.9 per cent.

In 2015-16, the growth in debt levels was down to a mere 1 per cent, indicating that efforts by India Inc to trim debt by cutting back on investments and selling off assets have paid off to a marked extent.

Impact of low rates With debt levels moderating, interest cost for companies too has risen by a modest pace. After shooting up by over 25 per cent annually until 2013-14, interest cost grew by just 7 per cent in 2014-15 and 2 per cent in 2015-16. The RBI’s aggressive money easing stance has also helped reduce interest costs for companies over the past year or so. Aided by lower interest burden and improving operating margins, net profits for companies have grown by about 6 per cent in 2015-16, after falling by 5 per cent in 2014-15.

But weak demand impacting sales growth of companies still remains a concern, though there have been some signs of revival in the last two quarters. For investment activity to pick up, banks need to clean up their balance sheets and prep themselves up for the next leg of lending. The RBI’s AQR review has, to some extent, cleaned up banks’ balance sheet.

Good buying opportunity So, which banking stocks should you bet on? For now, private sector banks such as YES Bank, IndusInd and HDFC Bank that deliver strong earnings growth continue to be market favourites. But investors can consider other stocks such as ICICI Bank, Axis Bank, SBI and Bank of Baroda, that continue to face near-term asset quality pressure but are well-placed to ride the economic recovery over the long run.

Reforms in sectors such as mining, and infrastructure segments like roads and power are beginning to reflect in the performance of companies.

Of the highly indebted sectors, power has shown a marginal improvement in interest cover. Debt levels of steel companies have also grown at a slower pace in the 2016 fiscal.