 "Rising interest cost points to worsening corporate finances")
A Business Standard analysis of around 350 companies shows India Inc's debt dynamics have deteriorated with interest costs growing much faster than their revenues.
At the same time, the profit growth of these firms has plummeted, dimming corporate prospects further.
Net sales (nominal) growth of these companies collapsed to a mere 2.2 per cent in the first half of 2015-16 from 12 per cent in the first half of 2014-15.
By comparison, interest costs have risen to 7.9 per cent in 2015-16, up from seven per cent in 2014-15 over the same period.
This combination of falling top line growth and soaring interest costs puts pressure on the sector's capacity to service its burgeoning interest costs, exacerbating an already precarious financial position.
Profitability, too, has come under severe pressure.
Profit before interest and taxes (PBIT) of these companies contracted 0.2 per cent in the first half of FY16, against a healthy growth of 20 per cent in 2014-15.
In five of the six sectors that Business Standard analysed in detail, companies have seen their sales grow at a slower pace than interest costs. In the construction sector, sales grew by a mere 1.7 per cent in the first half of the current financial year. By comparison, interest costs rose by a whopping 4.7 per cent.
Similarly in the real estate sector, sales growth was seen at 4.7 per cent, while interest costs grew by a staggering 7.6 per cent.
The situation is dire in the steel sector. While sales contracted 14.6 per cent in the first half of FY16, interest costs have risen 4.3 per cent.
A similar trend, although in varying magnitude, is observed in the automobiles and auto-ancillary segment. Net sales declined 0.9 per cent over April-September, while interest payments grew an astronomical 17 per cent. Part of the explanation for muted top line growth rests on the fall in prices.
"While companies may have seen volume growth, as we have WPI (wholesale price index) deflation, in value terms they may register negative growth," says Devendra Pant, chief economist at Ind-Ra.
Falling prices worsen debt dynamics. WPI declined from a peak of 185.9 in August 2014 to 176.6 in September 2015. On a year-on-year basis, it has been in negative territory since November last year.
The pace of contraction has worsened in the first half of the financial year and more so in the second quarter.
The index contracted by two per cent on an average in the first quarter. In the second quarter, it contracted by an average 4.5 per cent.
So even if firms see volumes grow, because of falling prices, top line growth will be muted. The debt dynamics have taken a turn for the worse.
"In case of petroleum, in the first half of the year, volumes grew eight per cent. But as prices have declined 20 per cent, the overall decline is 12 per cent despite an increase in volumes," says Pant.
This implies cash inflows are likely to be lower than in previous years, complicating the task of servicing the debt burden.
In two of the most indebted sectors - infrastructure developers & operators, and power generation & distribution segments - top line growth has been rather robust.
In the former segment, sales grew at a solid 22.1 per cent, while interest payments grew 18.9 per cent. In the power generation & distribution space, companies registered a sales growth of 12.8 per cent, while interest costs soared 21 per cent.
This rather unexpected increase in sales could in part be attributed to the asset sales that companies have resorted to, to fix their debt woes.
Lanco Infratech, for instance, sold its Udupi power plant to Adani Power for Rs 6,300 crore. Similarly, the Jaypee Group has also sold its hydro power assets to JSW Energy for Rs 9,200 crore.
Ideally, such asset sales should help companies pare down their debt levels and improve their financial position. However, whether this is a turn for the better is debatable.
According to analysts, in some cases where firms have resorted to asset sales to lesser their debt burden, their earnings capacity has suffered, as these assets contributed significantly to corporate earnings.
In such a scenario, while companies might see top line growth and reduction in debt, their ability to generate significant cash flow for financing future investments is questionable.
Despite these asset sales, it is troubling that the consolidated debt of these 350 companies grew 3.3 per cent - faster than their revenuegrowth.
This suggests that against the backdrop of flaccid revenue growth, debt levels continue to remain extraordinarily high.
According to a Credit Suisse report, debt levels of India's most indebted corporate houses have continued to pile up.
Part of the explanation is that, at the aggregate level, asset sales have been muted. According to Madan Sabnavis, chief economist at CARE, "asset sales are happening in pockets".
These results suggest that contrary to expectations, India Inc's debt situation has worsened in the first half of the current financial year.
According to news reports, rating agency CRISIL has downgraded debt worth Rs 2.4 lakh crore in the first six months of the current financial year, indicating worsening credit quality pressures.
A quick improvement in corporate balance sheets seems unlikely.
While at one level it depends on how quickly do firms sell off assets to de-leverage their stretched balance sheets, a broad-based improvement hinges on "how quickly demand firms up", says Pant.
A pick-up in demand will help push up revenue growth, generating the much-needed cash flows.
This will not only ease liquidity constraints, but also push capacity utilisation rates providing India Inc the impetus it needs to launch fresh investments .