Local firms have very low debt-to-equity ratios against their foreign counterparts.
The financial risk of domestic broking and investment companies is almost nil, with their debt-to-equity ratio moving marginally up from 0.27 in 2006-07 to 0.58 in 2007-08.
A review of eight firms indicates that they have increased their loan books by 382 per cent to Rs 3,344.66 crore in 2007-08, largely on account of raising unsecured loans. During the same period, the equity (net worth) of these firms rose by 123.3 per cent to Rs 5,747.52 crore, thanks to initial public offers (IPOs) by Edelweiss Capital, Motilal Oswal and Religare Enterprises.
| LITTLE LEVERAGE | ||||
| Debt-to-equity ratio | Cash to debt % | |||
| 2006-07 | 2007-08 | 2006-07 | 2007-08 | |
| Edelweiss Cap | 0.66 | 0.85 | 68.50 | 123.87 |
| Emkay Global | 0.04 | 0.16 | 2273.70 | 710.37 |
| Geojit Fin Ser | 0.00 | 0.06 | 0.00 | 914.89 |
| IL & FS Invsmart | 0.12 | 0.58 | 276.32 | 68.87 |
| India Infoline | 0.57 | 0.39 | 69.73 | 53.60 |
| Indiabulls Sec | 0.12 | 1.37 | 1055.25 | 214.26 |
| Motilal Oswal | 0.00 | 0.21 | 432960.00 | 293.34 |
| Religare Ent | 2.13 | 5.26 | 35.58 | 53.29 |
| Total | 0.48 | 1.01 | 128.37 | 94.15 |
A debt-to-equity ratio indicates the proportion of debt a company has relative to its net worth. The measure gives an idea of a company’s leverage and the potential risks in terms of its debt burden. A debt ratio higher than one indicates that a company has more debt than its net worth. However, for financial investment companies, a debt ratio of two is considered to be good.
High leverage is at the root of the current global financial crisis. Many of the US financial majors have crumbled as they were highly leveraged. In comparison to their US counterparts, the domestic financial companies are not highly leveraged.
Among the domestic companies, Religare Enterprises is highly leveraged, with a debt-to-equity (D/E) ratio of 5.26 in 2007-08, up from 2.13 in 2006-07. Religare’s high debt ratio is a result of its Rs 1,948-crore unsecured loans for margin deposits with exchanges. Emkay Global, Motilal Oswal and India Infoline are in the no-risk zone, with a D/E below 0.40. Indiabulls Securities is relatively highly leveraged with a D/E of 1.37.
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The domestic firms are risk-free as a major portion of their borrowed funds is kept with banks towards margin money and as security deposit. Financially, these firms have reasonably good returns from funds invested in fixed assets, investments and net current assets.
However, the current turmoil in the financial market has made it difficult for the frms to get high returns on the invested funds. Global stock prices have declined by over 40 per cent since their peak in January 2008, hampering the fund-raising plans of companies, either through public offers or private placement of equity shares.
Besides, with merchant bankers in the US reeling under mark-to-market losses on account of the subprime crisis, companies’ fund-raising plans through foreign currency convertible bonds (FCCBs) and private placement with qualified institutional bidders have also been hit.