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At a time when the government is trying to revive economic growth with a focus on infrastructure development, a new report by Standard & Poor’s (S&P), ‘India credit spotlight’, suggests Indian companies, especially those in sectors like utilities & infra, metals & mining, oil & gas and telecom, continue to have high debt on their books. However, the report points out, the level of debt of top Indian companies remains lower than comparable ones in China and the Asean region.
The total debt of India’s top 100 companies (except subsidiaries of multinational corporations) on the basis of market capitalisation stood at Rs 10.5 lakh crore in the year ended March 2011, according to the report. Since then, it has steadily grown to Rs 13 lakh crore in the year ended March 2012, Rs 15 lakh crore in the year ended March 2013, and to Rs 18.5 lakh crore the next year.
Indian companies, S&P says, have been investing for growth and in an expanding economy, have been comfortable with free operating cash flows. However, the problem arises from the pace of debt built over several years.
According to the report, debt in the utilities & infra sector has increased 2.5 times and in the metals & mining sector by 1.5 times in five years to the 2013-14. By comparison, the overall debt of all Indian companies increased by less than 1.5 times in the same period.
“Though there is an increase in leverage over several past years for all countries in emerging Asia, companies in these countries have focused on growth. This has led to higher investments, which in turn have resulted in capital spending causing higher debt levels,” says Mehul Sukkawala, senior director for corporate ratings (South Asia), Standard & Poor’s Ratings Services.
Debt levels
As part of the study, S&P analysed the operating cash flow, and leverage data of India’s top 100 corporates, on the basis of their market capitalisation (excluding Indian arms of MNCs). The overall ratio of debt and earnings before interest, taxes, depreciation and amortisation (Ebitda) for these firms, according to the report, stands at 1.5.
“More than 50 per cent of these 100 companies have debt vs Ebitda of 1.5 or less, reflecting the conservative financial policy a lot of companies follow. In contrast, less than 40 per cent of those surveyed in Chinese and the Asean regions have this ratio,” Sukkawala says.
“On the other hand, when we look at highly leveraged companies — that is companies with debt-to-Ebitda of more than five times — about 20 per cent of the companies in India fall into this category, compared with more than 25 per cent each in Asean and China,” he adds.
Capex plans
Despite India and the US being the two bright spots in the global economic scenario, corporate India is likely to go slow on capital expenditure plans. Capex spending, the report says, will only pick up in 2016-17, as many companies are waiting for the government to put policy into action before investing further. However, government companies are likely to continue capex, besides Mukesh Ambani-controlled Reliance Industries Ltd (RIL) among private ones.
The key to corporate growth will be whether the government can deliver on reform promises. If it does, S&P believes the top players will be ready to capitalise. Meantime, the corporate sector will maintain conservative stance towards growth.
“Companies are likely to consider new projects only after they sense the operating environment in India is improving at the ground level. They will also need to be confident that current investments are likely to generate good cash flows before they commit fresh investments. This is positive from a credit assessment perspective over the next 12 months, especially for companies with weak financial ratios and liquidity,” Sukkawala adds.
Reform agenda
Against the backdrop of favourable economic conditions, S&P believes a strong government at the Centre gives India the flexibility to pursue reforms that include initiatives like auction of energy resources (such as coal), a simplified tax regime, and accelerated approval procedures to speed up ease of doing business.
“There is a consensus in the market that India and the US are the brighter spots among the major global economies these days, in terms of growth potential. Indian economy has lately been supported by declining oil prices, which have provided some financial flexibility for the government and support the reform focus it has been pursuing since mid-2014. The fundamental growth story will unfold through a growth in investments,” said Michael Seewald, managing director for corporate ratings (South & Southeast Asia), Standard & Poor’s Ratings Services.
While the government needs to turn its plans into actions, coordinate better with states and remove bottlenecks across sectors to implement reforms, S&P believes it might have to dilute some of its reforms because of differing views of Opposition parties and the hesitancy of some of its allies.
Besides the need to find new funding options, dispute resolution, transparency in resource allocation, land acquisition and environmental clearances are key reforms needed for companies in the utilities & infra sector.
