Indian firms deleveraging fast, says SBI

Report says domestic companies, particularly those in the cement, fertiliser, trading and finance are now less dependent on resorting to debt

Indian companies are deleveraging in a meaningful manner and the perception that they are highly leveraged might not be the right one, says a research report by State Bank of India (SBI).

According to the report, authored by SBI’s chief economist Soumya Kanti Ghosh, domestic companies, particularly those in the cement, fertiliser, trading, finance and transport (airlines) sector, are deleveraging, or are now less dependent on debt.

“Top-rated companies are prepaying debt mostly from cash accruals. Cement, for instance, is one such case. However, some of them would be building a war chest for acquisition and may also resort to debt later at fine price,” said Ghosh.

Out of the 200 companies for which the research was done, 60 reported fall in debt levels in 2015-16 over 2014-15. The aggregate decline in debt levels, according to the report, was Rs 6,862 crore.

“Clearly, things are now looking better, contrary to popular perception,” the report said.

According to the report, focusing more on interest cover and the debt servicing ratios of the top 10 Indian companies to drive home the extent of corporate indebtedness is misleading, because what’s more important is “net worth, cash in hand, yearly accretion to net worth, investments, market value of assets and unbundling of value of some subsidiaries, thus, overall defining its repayment capacity”.

The overall indebtedness and debt-to-market capitalisation of such companies should be the right criterion. In that sense, SBI’s estimates show that on an aggregate basis, the top 10 companies’ ratios stood at 1.93x and 1.88x, respectively, which were “well within (the) respected level of 2x”.

Most of the ratings of these top 10 firms were above investment grade.

“While rating agencies' uniformity in applying rating parameters to various companies has also been inconsistent across continents, one nevertheless considers, as a matter of no choice, this as benchmark in raising debt. The investment grade companies... have been always able to raise resources at competitive rates,” the report said.

In listed companies, three finance companies -- Shriram Transport Finance, Cholamandalam Investment Finance and Motilal Oswal Finance, are reporting lower overall debt levels in FY16.

In fertilizer, Gujarat Narmada Valley Fertilizers Co Ltd (GNFC) reported loss to profit in FY16.

According to SBI, the fertiliser sector is also seeing a silent revolution, probably for the first time in 25 years.

Government's new investor policy is encouraging setting up of gas based urea plants in country. Already, there are three plants being set up in Kota (Chambal Fertlisers), Ramagundam (EIL and National Fertilisers Limited) and RCF. Additionally, with an aim to encourage setting up urea based plants in eastern part of country, government has directed NTPC, Coal India and ONGC to help set up plants at Sindhri, Gorakhpur and Barauni for facilitating Jagdishpur to Haldia gas pipeline being laid by GAIL.

SBI lauded UltraTech Cement Ltd for reporting lower long term indebtedness, but said the company needed to be watched more closely if it acquires Jaypee group's cement business.

Companies such as Maruti Suzuki and Essel Propack have also consistently brought down debt levels in last four years or so, the report said.

Among top five entities that deleveraged between fiscal 2016 and 2015, UltraTech Cement brought down debt by Rs 1,682 crore, Ushdev International by Rs 753 crore, GNFC by 711 crore, Interglobe Aviation by 639 crore and Shriram Transport by 632 crore, according to the report.