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Corporate debt rises—but there’s a silver lining

LiveMint logoLiveMint 04-06-2014 Madhura Karnik

Mumbai: Indian companies piled on more debt in the year to March, but there is a silver lining to it. The bulk of the corporate debt in the year was raised by companies with relatively strong balance sheets—an indication that the money will be used to fund expansion projects as the economy turns the corner.

A Mint analysis of 120 BSE-500 companies that have declared the annual debt numbers shows that aggregate gross debt hit `12.6 trillion as of 31 March, up from `10.8 trillion a year ago. In 2011-12, gross debt for the same set of companies totalled `8.87 trillion, up from `7.21 trillion in 2010-11.

Other companies in the BSE-500 list are yet to release their annual reports, which include the data on annual debt. Financial firms have been excluded from the analysis because their operating models are different.

Top companies including Reliance Industries Ltd (RIL), Oil and Natural Gas Corp. Ltd (ONGC), Power Grid Corp. of India Ltd (PGCIL) and NTPC Ltd were among the top 10 borrowers in fiscal 2014, adding `1.2 trillion of debt over the course of the year.

The others in the list of top 10 borrowers include Tata Steel Ltd, Oil India Ltd, Hindalco Industries Ltd, Idea Cellular Ltd, Jaiprakash Associates Ltd and Mahindra and Mahindra Ltd.

Together, these 10 companies constitute 45% of the total debt of the 120 companies for which data was available.

Rising corporate debt has been a concern in the face of slowing economic growth, high borrowing costs and stalled projects that have crimped corporate cash flows and burdened the banking system with bad loans.

In April, the International Monetary Fund (IMF) warned that high debt in some Indian companies may pose a risk to the country’s economic stability.

“A third of the corporate debt in India has a debt-to-equity ratio of more than three, the highest degree of leverage in the Asia-Pacific region,” the IMF had said in its Asia Pacific economic outlook report.

But this time around, the increase in corporate debt isn’t being seen as something to fret about given the strong credit profile of the top borrowers and the fact that the money they raised will go towards funding projects that are in the pipeline.

With a new government assuming office after the April-May general election and committing itself to reviving economic growth, which slumped to less than 5% in each of the previous two years, corporate confidence levels have improved.

Companies are keen to boost capital expenditure and expand production, said Sankar Krishnan, managing director and co-head of Alvarez and Marsal India, a provider of performance improvement, turnaround management and business advisory services.

“Firms can lower the borrowing costs by taking advantage of very low interest rates and position themselves for growth,” said Krishnan, adding that companies with strong credit profiles are taking advantage of low interest rates charged by domestic and foreign banks.

For instance, RIL, with a debt-equity ratio of 0.45, increased its gross borrowings by `26,592 crore in fiscal 2014 to `1.38 trillion. The debt includes stand-alone gross debt of `89,968 crore and subsidiary debt, mainly raised by Reliance Holding USA (`32,122 crore), Reliance Jio Infocomm Ltd (`14,763 crore) and Recron Malaysia (`1,592 crore), the company said in its annual report.

Standard and Poor’s Ratings Services (S&P) has rated RIL’s international debt rating at BBB+ with a “negative” outlook—two notches above India’s sovereign rating. Crisil Ltd rates RIL’s long-term debt AAA—the highest investment grade.

The addition of substantial debt has moved the company from a net cash position to a marginal net debt level, its annual report said, adding that the company drew down on funding to part-finance the expansion of its petrochemical capacities and the setting up of a new gasification plant and refinery off-gas cracker over the next two to three years.

“Generally, RIL carries out its treasury operations very well, and whenever the company gets a favourable rate of borrowing, it uses the opportunity,” said Deven Choksey, managing director and chief executive officer of KR Choksey Shares and Securities Pvt. Ltd.

“The addition in debt is not a concern because it still remains a cash-rich company and the proceeds of the debt will be used for expansion of its petrochemical and telecom operations in the future,” he added.

India’s largest power producer, NTPC, added debt worth `11,006 crore in 2014 to finance its expansion plans.

In August 2013, the company said in an investor presentation that it would raise over `1 trillion of debt to fund expansion plans laid out in the current Five-Year Plan, which ends in March 2017.

The 12th Plan outlay is `1.52 trillion, to be part-funded by `1.01 trillion in debt, NTPC said in the presentation.

The company has “easy access to domestic and overseas debt market and has mobilized debt on most optimal rates from both domestic and international markets due to low gearing and healthy coverage ratios,” the presentation added.

NTPC had a debt-equity ratio of 0.86 as of 31 March, according to Bloomberg data, and is rated AAA by rating agencies such as Crisil and Icra Ltd.

Companies are using the economic downturn to kick-start capital expenditure that may take two-three years to complete so that when demand returns to the economy, they are ready with higher capacities, said Deep Mukherjee, senior director, corporate ratings, India Ratings and Research Pvt. Ltd.

“Some may be...hoarding cash to build a war chest, while others may be refinancing their debt,” he added. companies continued to add to debt in financial year 2013-14, but the bulk of the borrowings were from companies with stronger balance sheets. Mint’s Madhura Karnik has details.

To be sure, some already highly leveraged companies are among the top borrowers as well. They include Tata Steel, Jaiprakash Associates and Bhushan Steel Ltd.

According to Bloomberg, Tata Steel had a debt-equity ratio of 1.62 as of 31 March, while Jaiprakash Associates and Bhushan Steel had debt-equity ratios of 4.16 and 3.46, respectively.

“The rise in debt for Jaiprakash Associates and Bhushan Steel is still a cause of concern because of the high leverage on their books,” said an analyst on condition of anonymity.

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