Citi wants India Inc to better debt-equity ratio

Citigroup considers Indian companies' lower leverage levels a bad strategy for enhancing return on equity (RoE).

The balance sheets of Indian companies are less leveraged and this is not an ideal strategy for enhancing RoE, said Ratnesh Kumar, director of Citigroup's India equity research.

Citigroup expects Indian companies to increasingly access debt to fund growth, which would ensure lesser equity supply pressure and in turn lead to higher RoE.

Markus Rosgen, managing director and head of Asia strategy at Citigroup investment research, said the RoE in Asia is among the highest in the world at 14 per cent. But to increase it to about 24 per cent, the net debt to equity ratio will have to to increase.

The Citigroup officials were speaking at a media conference as a three-day Citigroup India Investor Conference 2006 began to showcase India to over 150 top institutional investors from the US, Europe, Asia-pacific and Japan.

The conference is being hosted in Mumbai for the first two days. Robin E Rubin, former US treasury secretary and director and chairman of the Citigroup's executive committee, will address the foreign investors at the India session on the third and concluding day to be held in New Delhi.

Citigroup feels though the RoE in Asia excluding Japan is at a 24-year-high, it is a result of increased sales revenues from enhanced use of existing assets and not due to increased margins or increase in leveraging of balance sheet.

Dwelling on capital flows into India, Kumar said earnings and interest rates are the two variables on which re-rating of a country takes place.

There is an element of expectation on the earnings front and there is a need for Indian companies to deliver. "The performance of the Indian market depends on earnings performance than interest rate movements," Kumar said.

Asked whether India is at a greater risk than during the east Asian crises of 1997, Kumar said "India is much more vulnerable today as almost 20 per cent of Indian companies are owned by FIIs as the capital market is not domestic any more. The economy and the corporate sector earnings are still dependent on domestic factors."

Citigroup India CEO Sanjay Nayar said foreign sources of debt are more open now and it will be a very attractive source of funds if the rupee stays stable.

On the increased flow of money into domestic mutual funds, Nayar said it is psychologically a comforting factor for foreign institutional investors (FIIs) as this provides a cushion when they want to sell.

Kumar, however, felt the scale of domestic mutual funds was not enough to counter foreign flows. The market valuation of FII investments in India has crossed $100 billion.