Many of India Inc's sterling names, which borrowed little in the past couple of years and turned out strong cash flows, are getting leveraged, courtesy some high-priced acquisitions, economic slowdown and an anaemic equity market.
Tata Motors, for instance, is looking to refinance part of a Rs 1,450-crore bridge loan, Hindalco has just tied up a Rs 4,800-crore line of credit and Reliance Industries (RIL) is understood to have recently raised Rs 12,000 crore.
Take the case of the Rs 8,811-crore carrier Jet Airways, whose net debt to equity ratio is estimated to go up by nearly 755 per cent (eight times) by March 2009, with analysts expecting the long-term debt and convertible bonds to touch Rs 12,600 crore. The carrier has been attempting to do a rights issue but hasn’t succeeded and Jet may need to fork out nearly Rs 700 crore by way of interest alone in the current year. An estimate by Bank of America-Merrill Lynch puts the Rs 13,679-crore Suzlon’s net debt at around Rs 10,800 crore by March 2009, which would push up the net debt to equity ratio to one.
According to Pradip Shah, chairman of IndAsia Advisors, balance sheets are looking a little more stretched than they were a couple of years back. Moreover, with profits under pressure, the interest cover (the ratio of the operating profit to finance charges) may start coming down. Shah feels mid-sized and smaller firms could be in trouble. However, Mahesh Vyas, chairman, CMIE, believes that though companies may be somewhat more leveraged than they were over the last few years, their balance sheets would not be too stretched. “The debt-equity ratios will not be too high,” Vyas says, adding that even if the ratio is 1-1.2 for manufacturing firms, and a little higher for power or telecom companies, that should be fine.
The total debt of 2,157 companies, studied by the Business Standard Research Bureau, rose 27 per cent in 2007-08 to Rs 7.6 lakh crore over the previous year. For the same period, the profit before interest depreciation and tax (PBDIT) rose 22 per cent to Rs 4.2 lakh crore. However, 45 per cent of the debt comprised unsecured loans, much of which is possibly foreign currency convertible bonds, which, if converted into equity, wouldn’t need to be repaid.
As of now, the debt-equity ratio for most of the bigger firms hasn’t yet exceeded 1. Tata Motors, for instance, which has mopped up about Rs 4,000 crore from a rights issue and should be looking to borrow a similar amount more, may end up with total borrowings of around Rs 9,000 crore by March 2009, estimate analysts. That would be higher by about 46 per cent over the borrowings at the end of 2007-08. The company’s debt to equity could rise to 0.5-0.6 this year, depending on how much is actually borrowed. With CV sales sluggish, cash levels could hit their lowest levels in several years and weak operating margins may just let the interest cover slip from nearly 10 times last year.
The story is somewhat similar at Tata Steel. Softening steel prices may mean lower operating profits and, therefore, the EBITDA (earnings before interest depreciation and tax) to finance charges, could slip by the end of the year from just over two times at the end of September 2008. Citigroup estimates that at the end of September 2008, the debt on the books of Tata Steel alone would have been close to Rs 20,000 crore, with the debt –equity ratio at 0.8 times.
It’s the Corus balance sheet that is more worrying (Tata Steel has no recourse to the debt on Corus’ books) and with the operating profit expected to be very weak in the December 2008 quarter, Morgan Stanley believes that Corus’ debt covenants may come under pressure in the near term.
Corus had indicated that the debt on its books at the end of September 2008 is close to Rs 2,450 crore; however, Morgan Stanley believes that there could be some additional short-term loans.
Hindalco’s debt-equity ratio is unlikely to cross one in the current year and should stay at around 0.9 levels in 2009-10 too, analysts estimate. The aluminium producer’s net worth is up at nearly Rs 22,800 crore post the recent rights issue, but analysts estimate that borrowings could cross Rs 20,000 crore this year if the Aditya Birla Group company makes additional borrowings after it recently tied up a $1 billion line of credit. With weak aluminium prices threatening to push down operating profits this year to around Rs 5,500 crore from Rs 6,635 crore in 2007-08, it’s possible that the firm’s interest cover could fall to somewhere between 2.7-2.8 from a much higher 3.6 last year.
CMIE’s Vyas believes that an interest cover of two times is good enough. “Unless it falls below these levels, there should be no problems,” he says.
Reliance Communications had a net debt of Rs 15,226 crore at the end of September 2008. This is expected to swell to Rs 20,000 crore (including buyers credit) by March 2009 with the telco having spent an estimated Rs 18,000 crore on capital expenditure in the current year. The net debt to equity by March 2009, analysts estimate, should be around 0.8, up from 0.4 in 2007-08. However, analysts believe the firm may need to borrow more to bid for 3G auctions and roll out the GSM network.
| JET AIRWAYS |
| Net debt to equity ratio is estimated to go up by nearly eight times with analysts expecting the long-term debt and convertible bonds to touch Rs 12,600 crore |
| TATA MOTORS |
| The Tata group company, which has mopped up about Rs 4,000 crore from a rights issue and should be looking to borrow a similar amount more, may end up with total borrowings of around Rs 9,000 crore by March 2009 |
| RCOM |
| RCom had a net debt of Rs 15,226 crore at the end of September 2008. This is expected to swell to Rs 20,000 crore by March 2009 with the telco having spent an estimated Rs 18,000 crore on capital expenditure in FY09 |
| M&M |
| At Mahindra & Mahindra, the consolidated net debt as at the end of March 2009 should be in the region of Rs 9,800 crore, up by about Rs 1,700 crore over 2007-08, point out analysts |
RIL’s balance sheet remains strong with the net debt to equity ratio expected to come off to 0.3 in 2009-10 from around 0.4 in the current year. Industry watchers wonder why the company has reportedly borrowed Rs 12,000 crore because the company should see strong annual cash flows of Rs 30,000--40,000 crore from operations starting 2009-10. As a result, the company’s net debt , which is currently estimated at around Rs 50,000 crore, should fall over the next few years.
At the Rs 23,774-crore Mahindra & Mahindra, the consolidated net debt as at the end of March 2009 should be in the region of Rs 9,800 crore, up by about Rs 1,700 crore over 2007-08, point out analysts. Compared with previous years though, the current year will have seen smaller spends on capital expenditure — estimated at around Rs 1,650 crore — half the amounts spent in the last couple of years.
With sales of both tractors and utility vehicles somewhat slow, cash flows could be lower at just under Rs 1,300 crore, less than half the levels of last year and a third of what it was in 2007-07. The net-debt to equity ratio is still under 1 and analysts are pencilling in a lower interest cover of around 3 from levels of over 4.5 last year.
