IL&FS now has the most leveraged balance sheet among large-sized NBFCs

Debt-equity ratio jumped to 14.5x in FY18 against sector average of 5.6x

As losses mount at its various subsidiaries, Infrastructure Leasing & Financial Services (IL&FS) now has the most leveraged balance sheet, on a consolidated basis, in the large non-banking finance company (NBFC) space.

The company had borrowings of Rs 910 billion at the end of FY18, including current maturities of long-term borrowings worth Rs 122 billion. With net worth of Rs 54.3 billion, its debt-equity ratio translated to 16.8x as of March 2018, against 10.6x a year ago.

This is more than thrice the industry average in FY18. Top listed and unlisted non-bank lenders, excluding IL&FS, reported an average leverage ratio of 5.6x at the end of March. State-owned Housing and Urban Development Corporation (HUDCO) had the least leveraged balance sheet, while LIC Housing Finance has the most stretched balance sheet, with debt-to-equity ratio of 11.4x at the end of March, among listed companies.

Other big lenders in the sample include HDFC, NABARD, Power Finance Corporation, Rural Electrification Corporation, IDFC, Indiabulls Housing Finance, and Bajaj Finance.

The sharp rise in IL&FS’ leverage ratio in FY18 was due to a combination of the decline in net worth and incremental borrowings last fiscal. Its net worth (on a consolidated basis) declined 28 per cent on a year-on-year basis in FY18, while its total borrowings were up 13.8 per cent during the period.

IL&FS operates as a core investment company, wherein the parent implements various infrastructure projects by setting up project or sector-specific special purpose vehicles (or subsidiaries), or by investing in joint ventures. The company reported 186 subsidiaries in its annual report for FY18.

The company reported a net loss of Rs 24 billion on a consolidated basis in FY18, against net profit of Rs 2.9 billion a year ago. This, analysts say, led to erosion in the company’s net worth, resulting in a spike in its leverage ratio. IL&FS’ finance costs (or interest on borrowings) were up 21.6 per cent in FY18, putting further stress on finances.

Analysts say any rise in leverage ratio beyond 10x is a sign of worry and signals financial distress. "NBFCs typically work with debt-to-equity ratio of six-nine times, with latter being an upper limit rarely crossed," says Dhananjay Sinha, head of research, Emkay Global Financial Services.

According to RBI regulations, banks have to maintain capital adequacy of at least 9 per cent, or net worth should not be less than 9 per cent of a lender’s assets. This translates into gross debt-to-equity ratio of around 11x. “If IL&FS were a commercial bank, the central bank would have asked it to stop making new loans due to lack of capital,” said  an analyst on the condition of anonymity.

In comparison, net worth was equivalent to just 7 per cent of IL&FS borrowings at the end of FY18, and covered just 4.7 per cent of its assets (or liabilities). This is nearly a third of the industry’s average ‘net worth-to-assets’ ratio of 14.2 per cent in FY18.