India Inc debt: The good, the bad and the ugly

Which sectors and companies are bucking under the debt burden or shaking it off? Analysis of data for 1,190 NSE listed companies since FY09. Here are the findings 

The much awaited ordinance empowering the Reserve Bank of India to effectively tackle bad loans has been passed few weeks ago. Clearly, resolving the banking sector’s bad loan issue is the Centre’s top priority. And rightly so.

Not long ago, the RBI, in a bid to clean up banks’ balance sheets, undertook an AQR (asset quality review) exercise and forced banks to declare certain accounts as non-performing assets (NPAs).

That was six quarters ago. Even after the near doubling of banks’ bad loans over the past six quarters to about ₹7 lakh crore, the meter is still running. Is India Inc still neck-deep in debt?

While the AQR has been a massive step forward, bringing the severity of the problem to light, little has been done to resolve the underlying assets to which banks had lent.

Most of the assets, according to the RBI, remain laden with such high levels of bank debt that they have little or no capacity to raise funding for working capital and capital expenditures, or to attract private investors to turn them around.

Data for 1,190 NSE listed companies since FY09 were analysed to find out how grim the debt situation is for corporate India.

On the face of it, the scenario does appear to have changed drastically over the two years leading up to FY16 (and September 2016 wherever data is available); companies are consciously beginning to prune their debt.

At the same time, the top 20 companies (by debt) still contribute nearly half of the total debt of NSE listed companies. These companies have lost an eye-watering ₹2.4 lakh crore in market capitalisation over the past two years, despite the bulls charging up D-Street.

Here’s the good, the bad and the ugly of India Inc’s debt situation.

The good

Debt accretion halts

It is well known by now that the stock pile of banks’ stressed assets is a result of excessive lending between 2009 and 2013, particularly to sectors such as infrastructure, power, textiles, metals, etc.

But after growing by about 19 per cent annually between FY09 and FY13, debt accumulation slowed considerably to 6 per cent between FY14 and FY16. In fact, as of half year ended September 2016, debt accretion appears to have halted (flat over the previous year). The number of companies that raised debt has also reduced notably over these two years.

Between FY09 and FY13, the number of NSE listed companies that increased debt was 826. The count has fallen to 600-odd companies between FY14 and FY16. In fact the number of companies that pruned their debt increased to 524 between FY14 and FY16, from 322 in the period between FY09 and FY13.

Many corporates that accumulated huge debt in the past have trimmed their debt substantially between FY14 and FY16. Adani Enterprises, IOCL, Tube Investments, HPCL, and JP Associates (to some extent) are some of them. Adani Enterprises and IOCL have shed over ₹50,000 crore and ₹30,000 crore, respectively, of debt during this period.

Extent of leverage moderates

Up until 2013-14, aside from the fast pace of accumulation of debt, the problem had also gotten larger in size with more number of companies’ debt-equity ratio rising to over three and five times. In 2010-11 for instance, the number of companies that had debt-equity ratio of more than three was 81 (of the 1,190 NSE listed companies). This number went up to 113 in FY14. Similarly, the number of companies with debt equity of over five had nearly doubled from 31 to 57 during this period.

The extent of over-leverage among NSE listed companies appears to have eased up somewhat over the past two years. As of FY16, the number of companies with debt-equity ratio of more than three and five has fallen to 89 and 49, respectively. As of September 2016, the number has shrunk even more to 62 (companies with debt-equity ratio of more than three) and 43 (more than 5).

Among the highly-leveraged companies as of FY14 that have reduced their debt substantially over the past two years are Tube Investments, Sterlite Technologies (based on FY17 data), HPCL, CPCL, and Adani Enterprises. The debt-equity ratio for these companies stood at 1-2 times as of FY16.

The bad

Still low interest cover

True, debt accumulation has slowed substantially over the past two years, and along with it, the rise in interest costs. Between FY09 and FY13, interest costs had grown by 19 per cent annually. The pace of annual increase in interest costs has fallen substantially to 8 per cent between FY14 and FY16.

In fact, for the half year ended September 2016, interest costs have shrunk by 2 per cent over the previous year. The sharp fall in interest rates in the economy over the past year or so has led to a notable fall in interest costs for corporates.

But despite the relief on the interest cost front, earnings have been impacted due to weak demand and, hence, sales growth. Sales for India Inc, which grew by about 15 per cent annually between FY09 and FY13, have remained flat to marginally negative over the past two years (between FY14 and FY16). This has offset the benefits of lower interest costs.

As a result, the interest cover for NSE listed companies has only deteriorated over the past two years. Between FY09 and FY13, the interest cover — ability of a company to service its interest payments — fell from around 5 times to 3.5 times. Since FY14, the cover has shrunk further to 2.7 times as of March 2016.

However, in recent quarters, sales growth has started to pick up and so has the interest cover. As of December 2016, sales growth inched up to 6 per cent YoY from 2-odd per cent in the September quarter. Interest cover has moved up to about 3 times. But interest rates in the economy can play spoilsport.

With the RBI’s rate cut cycle, which began in 2015, coming to an end and rate hikes in the offing over the medium term, India Inc can soon start to feel the heat, if demand does not recover significantly in the coming quarters.

Weak turn weaker

Over the last two years, companies with low leverage (debt equity <1) have managed well. A chunk of such companies have a comfortable interest cover of more than 2 times. But for companies that have a higher leverage (debt-equity ratio of more than 1), interest cover has slipped from 1.7 times in FY14 to 1.3 times in FY16. For companies with debt-equity of over three times, the situation is far worse. From an already low cover of 1 times (just about meeting interest payments) in 2013-14, interest cover fell to 0.5 times in 2015-16.

Of the 1,190 NSE listed companies under analysis, one-tenth had negative net worth as of 2015-16. In 2013-14, the tally of companies with negative networth was half of this (around 56 companies). Among the companies with huge debt, Lanco Infratech, MTNL, Unity Infraprojects, Jindal Photo, Jindal Stainless, Madhucon Projects, GTL Infra, Tata Communications, Jyoti Structures, Era Infra Engineering, Punj Llyod, Tata Teleservices (Maharashtra), ABG Shipyard, Jet Airways, Suzlon Energy and REI Agro — all had negative networth as of FY16.

Based on the limited information available as of September 2016, most of the companies mentioned above still carry negative net worth.

Less cash pile

While India Inc has been able to temper the pace of debt accretion, it has been accompanied by a reduction in cash holdings too. After a 10-odd per cent annual growth between FY09 and FY13, Indian companies’ cash balances have actually shrunk by 3 per cent between FY14 and FY16. The net debt (adjusted for cash) position, hence, has seen a slightly higher growth of 8 per cent between FY14 and FY16 (when compared to the 6 per cent growth in debt alone). Of the highly leveraged companies, Hindustan Construction, JP Power Ventures, GVK Power & Infrastructure, Tata Steel and JP Associates have seen a substantial fall in their cash holdings between FY14 and FY16.

The ugly?

Infrastructure and construction, power, iron and steel, mining, textiles and cement are sectors that continue to contribute significantly to banks’ stressed loans. In fact, the watchlist — key source of future stress — created by leading banks such as Axis, ICICI Bank and SBI comprises accounts mainly from these sectors.

For some of these sectors, the pace of debt accretion has not slowed.

In textiles, for instance, after debt grew by 12 per cent annually between FY09 and FY13 for NSE listed companies in the space, it has continued to grow — a tad higher at 14 per cent annually between FY14 and FY16. Bombay Rayon, with a debt-equity of a little over 2 times as of FY16, has seen a steady rise in debt since FY14. JBF Industries and SEL Manufacturing are other companies that sported over 3 times debt equity as of FY16. Bannari Amman Spinning, Morarjee Textiles and Trident are other companies that have seen a steady rise in debt between FY14 and FY16.

Telecom is another sector that has seen debt rise by 15 per cent annually between FY14 and FY16. Bharti Airtel, Idea Cellular, and Reliance Communication — all have raised additional debt during this period. For Airtel, consequent to the spectrum acquired worth ₹14,281 crore during the October’16 auction, the company’s consolidated net debt has increased to ₹97,395 crore as of December 2016 from ₹83,510 crore as of March 2016. For Idea, the net debt as of December 2016 stands at ₹49,138 crore (up from ₹38,441 crore as of FY16).

While the overall picture for steel companies looks less gloomy from the past, with debt growing at a much slower pace of 7 per cent annually between FY14 and FY16 (when compared to 16 per cent in the past), company-specific issues persist.

Debt-ridden companies such as Bhushan Steel, Electrosteel Steels, Jindal Steel, JSW Steel, and Tata Steel continue to raise debt. Monnet Ispat, Usha Martin and Visa Steel are other companies that added debt on books.

Moreover, while a revival in global commodity prices has helped these companies somewhat, their interest paying capacity has not improved much. In fact, as of FY14, the interest cover for all NSE listed steel companies was 1.7 times, which fell to a less than 0.1 times as of FY16. As of September 2016, the interest cover has only marginally improved to 0.4 times.

Power companies’ woes are well known. From providing a lifeline to the ailing state-owned power distribution utilities (discoms) in the form of UDAY (Ujwal DISCOM Assurance Yojana) to boosting domestic coal supply, and providing subsidised gas to stranded fuel-starved plants, the Centre has kick-started many initiatives.

But even so, the country’s power generation hasn’t shown drastic improvement. Insufficient purchasing power of the financially-strapped state discoms is a key hurdle.

For now, debt woes continue to plague the sector. The overall debt equity for the sector has gone up to 1.7 times in 2015-16 from 1.4 times two years back. Interest cover has shrunk from 2.1 times to 1.7 times.

Adani Power, KSK Energy Ventures and Power Grid have seen debt levels rise steadily between FY14 and FY16. While Tata Power and JP Power Ventures have not raised significant debt, their debt equity ratios still remain high at about 3-3.3 times.

As of September 2016, the debt equity ratio for Adani Power remains high at nearly 7 times and for KSK Energy a little over 7 times.

Construction and Infrastructure is one of the sectors which contribute significantly to the level of stressed loans within the banking industry. While the pace of debt accretion has slowed down considerably for infra companies, the 14-odd per cent annual growth in debt levels between FY14 and FY16 remains a concern. Weak core performance has further reduced the interest paying capacity of many companies.

At an aggregate level, interest cover ratio has fallen from about 1.8 times in FY14 to 1.4 times in FY16. GMR Infra, IL&FS Transport and GVK Power Infra continue to carry very high debt to equity ratio of 4 times to as high as over 15 times. L&T and IRB Infra, too, have seen an increase in debt, but carry a relatively comfortable interest cover of nearly two times. The rest have a meagre less than or equal to 1 times cover.

The consolidated balance sheet is unavailable for the half year ended September 2016, in most cases.

In the construction space, again, debt-equity ratio continues to remain high and interest cover has been on a downtrend. Era Infra, Hindustan Construction, Patel Engineering, and Ramky Infra still carry high debt to equity ratio and have a very low interest cover. While JP Associates has been able to reduce its debt between FY14 and FY16, it still has a high, about 5 times, debt-equity ratio and less than 1 times interest cover.