Companies are piling up debt and that’s a worry when cash flows aren’t likely to keep pace.
India Inc, it turns out, is becoming increasingly indebted. Easy access to cheap money drove companies to spend more on buyouts and expansions but now many will have a difficult time paying it all back. A list put out by Merrill Lynch of companies that could have potential debt servicing issues, includes Jet Airways and Tata Motors. Profits, if not shrinking, aren’t growing too much either. So, if revenues are weaker in 20091-0, due to either volumes and prices coming off, their indebtedness is likely to go up, as highlighted by Kotak Securities.
For instance, should Pantaloon Retail’s same store sales come off by even 5 per cent next year, its net debt to operating profit could go up to 4.1 times from the current estimate of 3.8 times. Already the company’s free cash flows are turning weak—they could be negative by the end of the year.
For Suzlon, the ratio of the net debt to operating profit can rise from an already high estimate of 5 times, to 5.5 times, if volumes fall by about 10 per cent. According to analysts, it’s possible that the wind energy player’s cash flows from operations may turn negative next year. The chances of revenues coming off while debt and interest payments go up, are clearly possible in the real estate space. If prices fall by 10 per cent, Unitech’s net debt to operating profit could go up to 6.2 from the current estimate of 5.6 times.
Also in a bit of a spot is United Spirits. Should sales volumes turn out to be lower by even 10 per cent, the liquor firm’s net debt to operating profit could rise from 4.5 times estimated currently to to 5.3 times next year.
Given that the firm’s operating profits are expected to increase by just 8-9 per cent next year because of high raw material prices, United Spirits may need to raise money by selling treasury stock or placing equity. However, not everyone may be able to raise resources in a weak stock market and moreover, very few would be in a position to pick up a loan or convertible bond overseas.
