| Rising rate woes for debt-laden firms |
| Jitendra Kumar Gupta / Mumbai September 8, 2010, 0:19 IST |
The uptrend in interest rates and slowdown fears could hurt profitability of companies with high-debt.
The uptrend in the domestic interest rates and fears of a slowdown in industrial activity is not good news for companies that continue to have high debt in their books. India’s central bank, the Reserve Bank of India (RBI), continues to have a hawkish view due to the high inflation rate. Since January this year, it has increased the repo rate by 50 basis points to 5.25 per cent and cash reserve ratio by 100 basis points to six per cent.
Consequently, most large public and private sector banks have raised their prime lending rates by about 50 basis points to 11.75-13.25 per cent. More important, economists expect that – as the result of higher inflation (now hovering around 10 per cent) – and the projected economic growth of over eight per cent, the RBI is expected to further increase key policy rates by another 50-75 basis points in the current year. Companies with high debt on their books could, thus, see interest costs rising.
“Generally, higher interest rates mean higher interest costs. But the impact would be greater in the case of companies with high leverage in their balance sheets, or where business fundamentals are weak. However, it is subjective and the impact could be different for different companies,” says Deven Choksey, managing director, KR Choksey Shares and Securities.
In the backdrop of this emerging scenario, companies with high debt burden (particularly those where business fundamentals are not improving in a meaningful manner) and an inadequate cover to service the increased interest cost may feel the pinch.
We crunched numbers to figure out companies with high debt (debt-to-equity ratio in excess of one), low interest cover, subdued return ratios and market value of over Rs 1,000 crores. The table mentioned below, however, is only indicative and suggests that these companies could be vulnerable in a rising interest rate scenario. Read on to know more:
The prominent ones
Alok Industries, has seen its interest cost go up by 78 per cent in the June quarter, thanks to its huge debt in the books.
While textile firms like Alok benefit from lower-cost debt from the Textile Upgradation Fund, its debt-to-equity – at 3.4 times – is not very comforting as the near-term industry outlook is not very promising.
While the company hopes to monetise its land bank and reduce debt, analysts believe it may not be able to make a significant profit from sale of land.
| LOADED WITH LOANS | |||||||||
| in Rs crore | Mkt cap | Total debt | Debt-eq ratio (x) | Interest cover (x) | ROCE (%) | Net sales | Interest costs | % chg in int exp | PAT |
| Jet Airways | 6,205 | 14,418 | 125.6 | 0.4 | 0.0 | 10,095 | 1,024 | 20.9 | -239 |
| Bombay Dye. | 2,122 | 1,775 | 9.2 | 1.1 | 11.9 | 1,726 | 179 | -1.4 | 8 |
| Asahi India | 1,306 | 1,499 | 8.0 | 1.0 | 7.3 | 1,326 | 127 | -5.9 | 13 |
| Piramal Glass | 1,068 | 982 | 7.0 | 1.1 | 8.4 | 1,137 | 85 | -40.1 | 42 |
| Alok Inds.* | 1,489 | 6,956 | 3.8 | 1.6 | 8.1 | 4,627 | 606 | 107.2 | 257 |
| Wockhardt | 2,400 | 1,998 | 3.1 | 1.6 | 0.0 | 3,606 | 234 | -26.5 | -917 |
| GTL Infra. | 4,331 | 4,471 | 2.6 | 1.0 | 0.0 | 386 | 108 | 81.4 | -41 |
| Bajaj Hind.** | 2,181 | 4,056 | 2.4 | 1.3 | 7.7 | 2,314 | 207 | -5.8 | 171 |
| Dalmia Cem. | 1,631 | 2,895 | 2.0 | 2.1 | 9.6 | 2,168 | 196 | 28.6 | 59 |
| Nag. Fert | 1,257 | 3,132 | 1.9 | 1.8 | 6.9 | 1,990 | 150 | -3.4 | 70 |
| Aban Offshore | 3,327 | 3,153 | 1.8 | 2.3 | 16.1 | 3,408 | 968 | 11.3 | 56 |
| Suzlon Energy | 8,081 | 12,668 | 1.5 | 0.4 | 2.7 | 18,866 | 1,143 | 6.8 | -1442 |
| Moser Baer* | 1,037 | 3,330 | 1.5 | -0.4 | -1.8 | 2,032 | 184 | -11.3 | -127 |
