India Inc's debt fancy to prove costly

Indian corporates have borrowed more to finance expansions in the last two years, despite robust cash flow generation.

And those choosing to rely substantially on debt to finance their growth could face significant challenges that could weaken their credit profiles, according to a joint analytical report on top 50 Indian corporates by rating agency Standard & Poor's (S&P) and Crisil.

The report said although overall gearing measures remained healthy, seven of the 50 selected corporates maintained aggressive gearing with total debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of over three times, by the end of 2004-05 financial.

These companies are Reliance Energy, Sterlite Industries, Tata Power, Ballarpur Industries, Tata Tea, Hydroelectric Power Corporation And Power Grid Corporation. The debt-servicing ability of remaining companies could be weakened by a slowdown in demand or product price volatility.

Prices of steel, petrochemicals, copper, aluminium had peaked around the fourth quarter of 2004-05 and expected to see a downturn in 2008 when most of the capacity expansions are expected to go onstream. The year 2008 will be a challenging year as prices could go down and coincide with the commissioning of projects, said Greg Pau, director "� corporate ratings, S&P.

Many sectors have shown significant increases in debt over the past two years.

Companies that increased their debt by more than 10 per cent in the past two years outnumbered those that reduced their debt by over 10 per cent by a margin of 24 to 16.

Despite the large number of companies with increased debt, the small increase in total debt of the selected corporates was largely attributed to considerable debt reduction in the steel, chemical/petrochemical, and oil and gas sectors, which benefited from strong product prices.