India Inc's FY21 debt-equity ratio at 6-yr low on massive deleveraging move

Analysts expect a further reduction in the current financial year, helping companies lower interest cost and thereby boosting profitability

India Inc has taken a big leap towards repairing their balance sheet with debt-to-equity ratio dropping to lowest level six years at 0.59 in 2020-21. Analysts expect a further reduction in the ongoing financial year, helping companies lower interest cost and thereby boosting profitability. The debt-equity ratio for listed firms fell from 0.73 in FY20 to 0.59 in FY21. The decline was underpinned by 7 per cent year-on-year decline in net debt in FY21. “FY21 would mark the year where corporates focused on profitability, cash flow management, and balance sheet deleveraging to manage the fallout of the COVID-19 pandemic,” said a note by Motilal Oswal Financial Services. Experts say, that the net levels will fall further this fiscal.

The decline in debt levels in FY21 comes after sustained increase in outstanding borrowings by India Inc from just Rs 6.3 trillion in FY11 to Rs 26 trillion in FY20, which fell to Rs 24.4 trillion as on March 2021. The data is for companies that are part of the S&P BSE 500 index.

Experts point out that the current environment is in sharp contrast to the 2007-08 Bull Cycle, when financial leverage and capacity utilisations was high.

In recent years, India Inc has massively scaled back on capex and raised fresh capital mainly to retire debt.

“Right now, corporates are still deleveraging. At some point, this will change and companies will start spending on capex,” says Raamdeo Agrawal, chairman, Motilal Oswal Financial Services. “There is a lot of momentum building up in the economy. There is a view that we may be seriously on the cusp of a private capital expenditure (capex) cycle and that the China plus one manufacturing strategy for companies will kick off in earnest next year. The credit offtake in the economy will pick up pace once the country opens up and consumers and corporates get their confidence back.”

India Inc’s deleveraging drive is finding critical support from the primary markets. According to Prime Database, the amount of fresh capital raised in IPOs in 2021 stood at Rs 43,324 crore, which was greater than the last eight years combined.

Total equity capital raised both by new companies as well as listed firms amounted to Rs 2 trillion, of which a little over half was fresh capital.

V Jayasankar, Wholetime Director, Kotak Mahindra Capital Company, “Fund raising activity will continue to remain buoyant from companies that raised money in 2020 and 2021. They may come back to raise funds, looking for growth capital, deleveraging to support growth and specific events such as acquisitions, as the world returns to complete normalcy.”