A Cut on the Right Side
Equity markets need a positive sentiment and outlook to thrive. And they may be on the verge of getting that. At least, Mint St seems ready to help. But the policy front is still hostage to friendly pressure. So it remains to be seen whether the April rate cut is a sign of better things to come or just a short-term gamble.
ET Intelligence Group
tries to give you an idea of what lower rates would mean to India Inc, and the economy at large. That is if the inflation dragon does not play spoilsport, again
The underperformance of the Indian stock markets in 2011 was blamed on two major factors - policy paralysis and tight monetary policy. The emphatic upturn in the first couple of months of 2012 made one wonder if both these problems had vanished overnight. That surely was not the case and the markets soon stagnated.
It was only in the month of April that the Reserve Bank of India, in a surprising move, cut the benchmark interest rates by 50 basis points, offering hope that a solution had finally been found to at least one of the two major problems.
The rate cut has brought great relief to the corporate world. More so, to those companies which had suffered the most when the RBI governor kept raising rates in a bid to contain soaring inflation. Aggressive companies that had over-leveraged themselves to grow faster saw their earnings slide as the burden of interest costs mounted.
Today, there are a large number of companies that are spending a chunk of their earnings just to meet interest obligations. A lower interest burden would greatly help them in setting their shop in order.
Of course, not all of them will benefit equally as the rate cycle turns as they have different loan terms and their exposures to external commercial borrowings or foreign currency convertible bonds (FCCBs) etc vary.
ET Intelligence Group has tried to analyse a dozen such companies to ascertain how much their bottom lines stand to gain from a reduced interest burden. We have considered only non-finance companies with an interest coverage ratio below 2 — companies with an interest burden more than half of their pre-interest-and-tax profits of the last 12 months. We have excluded companies with bigger exposure to overseas borrowings such as Reliance Communications, since domestic rate cuts wouldn’t have any direct impact for them.
Most of these companies have started to work on plans to bring down debt to manageable levels. Some of those strategies involve selling non-core assets, seeking equity infusion or going slow on expansions. The success of these measures will only add to the gains they will derive from a general reduction in interest rates.
Interest rates within an economy greatly influence consumption and investment patterns. Lower interest rates not only boost consumption, but also make it less expensive for corporates to set up new factories and production capacities. Both these factors fuel overall economic growth. And it is when the outlook is positive that capital markets grow bullish.
We don’t know yet whether RBI governor has succeeded in taming inflation and hence the 50-basis point cut in interest rates. Or is it due to his growing concerns over India’s economic growth numbers, which have been weakening quarter after quarter. The governor did make it clear that, if inflation again becomes a menace, he wouldn’t shy away from raising rates. Hence, it will be hasty to conclude that interest rates are going to fall from hereon. One needs to closely watch the inflation numbers in the coming months to guess how the interest rates will move in future. At the same time, it could also be too late if one were to wait for the perfect picture to emerge.
ADHUNIK METALIKS
Adhunik Metaliks is engaged in mining, steel, power, transmission structures and value-added products. Its debt has increased considerably on account of its expansion in the power sector. As on September 2011, its consolidated debt stood at 3,614 crore, which is four times its equity. Moreover, it has an interest coverage ratio of 1.44, which is very low.
A 50 bps reduction in interest rates will result in a saving of about 4.52 crore per quarter for the company which will improve its profit by 20%. Its share price, however, hasn’t changed much since the interest rate cut announcement as it has other problems as well.
In addition to a high interest burden, the company has also been grappling with high raw material costs. Also, sluggish demand for steel and manganese ore has impacted its performance.
Adhunik Metaliks is engaged in mining, steel, power, transmission structures and value-added products. Its debt has increased considerably on account of its expansion in the power sector. As on September 2011, its consolidated debt stood at 3,614 crore, which is four times its equity. Moreover, it has an interest coverage ratio of 1.44, which is very low.
A 50 bps reduction in interest rates will result in a saving of about 4.52 crore per quarter for the company which will improve its profit by 20%. Its share price, however, hasn’t changed much since the interest rate cut announcement as it has other problems as well.
In addition to a high interest burden, the company has also been grappling with high raw material costs. Also, sluggish demand for steel and manganese ore has impacted its performance.
DLF
High debt is the biggest problem for DLF, the country’s largest real estate company. Despite sale of non-core assets, the debt-ridden company has not managed to bring down its debt. Its total debt at the end of December quarter had increased to over 25,000 crore. Servicing this debt is putting significant pressure on the company’s bottom line.
For the quarter ending December 2011, the company’s consolidated interest outgo stood at 620 crore which was 62% of its earning before interest and taxes.
However, DLF’s management is not unduly worried as more than half of the net debt burden of over 22,758 crore is going to be self financed as the company develops its land bank. For the rest, the company plans to raise 5,000-6,000 crore from the sale of non-core assets over the next six months, but some of these deals are yet to be signed given the weak state of the markets and macro economic conditions. Falling interest rates will definitely bring down the borrowing cost for the company that is currently at around 13-14%. However, this factor has already been discounted in the current stock price of the company.
High debt is the biggest problem for DLF, the country’s largest real estate company. Despite sale of non-core assets, the debt-ridden company has not managed to bring down its debt. Its total debt at the end of December quarter had increased to over 25,000 crore. Servicing this debt is putting significant pressure on the company’s bottom line.
For the quarter ending December 2011, the company’s consolidated interest outgo stood at 620 crore which was 62% of its earning before interest and taxes.
However, DLF’s management is not unduly worried as more than half of the net debt burden of over 22,758 crore is going to be self financed as the company develops its land bank. For the rest, the company plans to raise 5,000-6,000 crore from the sale of non-core assets over the next six months, but some of these deals are yet to be signed given the weak state of the markets and macro economic conditions. Falling interest rates will definitely bring down the borrowing cost for the company that is currently at around 13-14%. However, this factor has already been discounted in the current stock price of the company.
GMR INFRASTRUCTURE
Most of GMR Infrastructure (GMR Infra)’s debt of 26,000 crore is at the project level, which is to be paid over the concession period of the project. GMR Infra has 24 projects spread across airports, power and roads. Apart from high interest rates, the company has been impacted by low gas availability from the KG basin and delay in fixing tariffs at the Delhi airport. As a result, GMR Infra’s operating profits were not sufficient to service its interest payments in FY12. However, in FY13, five projects are expected to become operational. The new projects, softening interest rates and tariff revision at the Delhi airport would improve its profitability in the coming quarters. The stock is currently trading at 1.4 times its book value. The current market price has discounted most of the concerns pertaining to the company. Any positive development would result in an uptick in the stock price, which is currently at 28.5.
Most of GMR Infrastructure (GMR Infra)’s debt of 26,000 crore is at the project level, which is to be paid over the concession period of the project. GMR Infra has 24 projects spread across airports, power and roads. Apart from high interest rates, the company has been impacted by low gas availability from the KG basin and delay in fixing tariffs at the Delhi airport. As a result, GMR Infra’s operating profits were not sufficient to service its interest payments in FY12. However, in FY13, five projects are expected to become operational. The new projects, softening interest rates and tariff revision at the Delhi airport would improve its profitability in the coming quarters. The stock is currently trading at 1.4 times its book value. The current market price has discounted most of the concerns pertaining to the company. Any positive development would result in an uptick in the stock price, which is currently at 28.5.
IVRCL
IVRCL is one of the largest players in the irrigation segment. Over the years, the company has also ventured into BOT road projects. A BOT project is usually funded by 70% debt. Currently, the company has 11 BOT projects out of which four are operational. Because of these projects, the company’s gross debt has increased from 2,500 crore in FY09 to 4,300 crore in FY11. Although, the debt levels are reasonable, what has made the situation worse is the slow execution of the irrigation projects and rise in working capital requirement. To reduce its debt, the company intends to sell a part of its land bank at Noida. In addition, it is looking at stake sales in a few of its road projects.
While falling interest rates and sale of assets would improve its profitability, it is the pace of project execution that would determine its growth. In the current financial year, IVRCL has increased its order book by 9% to over 25,000 crore. But its revenues have been consistently decreasing on a y-o-y basis. IVRCL is currently trading at 0.6 times its book value, which is low compared to its historical price-to-book value of one.
IVRCL is one of the largest players in the irrigation segment. Over the years, the company has also ventured into BOT road projects. A BOT project is usually funded by 70% debt. Currently, the company has 11 BOT projects out of which four are operational. Because of these projects, the company’s gross debt has increased from 2,500 crore in FY09 to 4,300 crore in FY11. Although, the debt levels are reasonable, what has made the situation worse is the slow execution of the irrigation projects and rise in working capital requirement. To reduce its debt, the company intends to sell a part of its land bank at Noida. In addition, it is looking at stake sales in a few of its road projects.
While falling interest rates and sale of assets would improve its profitability, it is the pace of project execution that would determine its growth. In the current financial year, IVRCL has increased its order book by 9% to over 25,000 crore. But its revenues have been consistently decreasing on a y-o-y basis. IVRCL is currently trading at 0.6 times its book value, which is low compared to its historical price-to-book value of one.
JAIN IRRIGATION
Jain Irrigation’s debt woes have emanated from its high speed growth in micro-irrigation systems facing delayed subsidy payouts from the state governments.
Since micro-irrigation systems contribute half of the company’s revenues, a slowdown in the subsidy payments has resulted in a bulging working capital burden. Although the central government has been consistently increasing its allocation for irrigation projects, the payments are routed through state governments, which leads to delays. JISL’s outstanding debtors doubled between March 2010 and September 2011, increasing the working capital by 60%. With rising costs, financing this huge working capital became more and more expensive. The company’s interest cost for the first nine months of FY12 at 251 crore was up 58% while its net profit almost halved to 95 crore against the same period a year-ago.
The company is going slow in states where its outstandings are high. Similarly, it is focusing on overseas operations and exports to drive its growth. It is also in the process of setting up a non-banking financial company (NBFC) to fund its working capital. The management was earlier planning to sell an equity stake to bring down the debt-equity ratio, but that became impractical as its stock price crashed. The current market price appears to discount most of the company’s problems and may see an upside once its efforts start showing results.
Jain Irrigation’s debt woes have emanated from its high speed growth in micro-irrigation systems facing delayed subsidy payouts from the state governments.
Since micro-irrigation systems contribute half of the company’s revenues, a slowdown in the subsidy payments has resulted in a bulging working capital burden. Although the central government has been consistently increasing its allocation for irrigation projects, the payments are routed through state governments, which leads to delays. JISL’s outstanding debtors doubled between March 2010 and September 2011, increasing the working capital by 60%. With rising costs, financing this huge working capital became more and more expensive. The company’s interest cost for the first nine months of FY12 at 251 crore was up 58% while its net profit almost halved to 95 crore against the same period a year-ago.
The company is going slow in states where its outstandings are high. Similarly, it is focusing on overseas operations and exports to drive its growth. It is also in the process of setting up a non-banking financial company (NBFC) to fund its working capital. The management was earlier planning to sell an equity stake to bring down the debt-equity ratio, but that became impractical as its stock price crashed. The current market price appears to discount most of the company’s problems and may see an upside once its efforts start showing results.
JP ASSOCIATES
Jaiprakash Associates current debt stands at 45,000 crore, which is one of the highest among its peers. Its debt has grown over the past couple of years for its real estate development and greenfield expansion of cement plants. The company is in the process of doubling its cement capacity to 23 million tonne per annum (MTA). With this expansion, it would be one of the top five players in terms of capacity.
To reduce its debt, the company is looking to divest stake in a few of its cement plants. While macro-economic problems have resulted in underperformance of all infrastructure stocks, change in the UP state government has resulted in a negative sentiment for the company’s stock. Over the last six months, JP Associates’ stock has given a return of 8.2% while its peer Reliance Infrastructure has jumped 32%.
Jaiprakash Associates current debt stands at 45,000 crore, which is one of the highest among its peers. Its debt has grown over the past couple of years for its real estate development and greenfield expansion of cement plants. The company is in the process of doubling its cement capacity to 23 million tonne per annum (MTA). With this expansion, it would be one of the top five players in terms of capacity.
To reduce its debt, the company is looking to divest stake in a few of its cement plants. While macro-economic problems have resulted in underperformance of all infrastructure stocks, change in the UP state government has resulted in a negative sentiment for the company’s stock. Over the last six months, JP Associates’ stock has given a return of 8.2% while its peer Reliance Infrastructure has jumped 32%.
KEMROCK INDUSTRIES
Kemrock Industries is India’s leader in plastic composite products or fibre-reinforced plastic (FRP) products that are used in a wide variety of industries such as wind mills, aerospace, petroleum, mass transport and infrastructure. The company has aggressively expanded its capacities in India due to which it has frequently raised debt and diluted equity. Kemrock has become India’s first company to manufacture carbon fibre on a commercial scale with the commissioning of its 400 tonnes per annum capacity last year, which it plans to double.
In the process, its debt-equity ratio rose to 1.6 at the end December 2011, while interest cost jumped 56% to 70.3 crore for the July-December 2011 period. In the last six months the company has made a $30-million GDR issue followed by a $100-million FCCB issue to fund its ongoing expansion plans. Lower domestic interest costs would surely help the company’s profitability in future.
Kemrock Industries is India’s leader in plastic composite products or fibre-reinforced plastic (FRP) products that are used in a wide variety of industries such as wind mills, aerospace, petroleum, mass transport and infrastructure. The company has aggressively expanded its capacities in India due to which it has frequently raised debt and diluted equity. Kemrock has become India’s first company to manufacture carbon fibre on a commercial scale with the commissioning of its 400 tonnes per annum capacity last year, which it plans to double.
In the process, its debt-equity ratio rose to 1.6 at the end December 2011, while interest cost jumped 56% to 70.3 crore for the July-December 2011 period. In the last six months the company has made a $30-million GDR issue followed by a $100-million FCCB issue to fund its ongoing expansion plans. Lower domestic interest costs would surely help the company’s profitability in future.
MERCATOR
At the peak of the shipping cycle, Mercator decided to diversify its business. The company bought coal mines in Indonesia and Mozambique in 2008. As a result, its debt went up from 1,834 crore in FY07 to 3,273 crore in FY11. The company’s businesses except the coal part have become less and less profitable. This has impacted the company’s cash flows from operations while the interest cost has surged.
In the first nine months of FY12, interest to earnings before interest and tax was almost 70% versus 28% in 2008 before the acquisition of the coal mines. Declining earnings and increasing interest burden did not augur well with the investors and the company lost 75% of its market capitalisation. The recent rate cut would not help the company much as it has significant foreign loans, but would boost investor sentiment. Besides, the company’s December numbers were also encouraging with the company posting its highest ever sales of 1,100 crore and the highest PAT in the last six quarters at 23.4 crore.
At the peak of the shipping cycle, Mercator decided to diversify its business. The company bought coal mines in Indonesia and Mozambique in 2008. As a result, its debt went up from 1,834 crore in FY07 to 3,273 crore in FY11. The company’s businesses except the coal part have become less and less profitable. This has impacted the company’s cash flows from operations while the interest cost has surged.
In the first nine months of FY12, interest to earnings before interest and tax was almost 70% versus 28% in 2008 before the acquisition of the coal mines. Declining earnings and increasing interest burden did not augur well with the investors and the company lost 75% of its market capitalisation. The recent rate cut would not help the company much as it has significant foreign loans, but would boost investor sentiment. Besides, the company’s December numbers were also encouraging with the company posting its highest ever sales of 1,100 crore and the highest PAT in the last six quarters at 23.4 crore.
PANTALOON RETAIL
Pantaloon Retail is struggling with a heavy debt burden. In the last fiscal, the company’s debt increased by 80%. The main reason for this was aggressive expansion plans, which needed higher inventory and hence higher working capital. However, the company’s sales did not pick as expected, increasing the interest to sales ratio and affecting the company’s earnings.
In the December quarter, it posted a net profit of only 4 crore on sales of 3,175 crore. This is because of the high interest outgo, which was at 90% of the earnings before interest and tax in the quarter. Though the company is trying to sell stakes in some of its subsidiaries to reduce the debt, the recent rate cuts would give the company a breather, at least till it finds a buyer for the stakes that it intends to offload.
Pantaloon Retail is struggling with a heavy debt burden. In the last fiscal, the company’s debt increased by 80%. The main reason for this was aggressive expansion plans, which needed higher inventory and hence higher working capital. However, the company’s sales did not pick as expected, increasing the interest to sales ratio and affecting the company’s earnings.
In the December quarter, it posted a net profit of only 4 crore on sales of 3,175 crore. This is because of the high interest outgo, which was at 90% of the earnings before interest and tax in the quarter. Though the company is trying to sell stakes in some of its subsidiaries to reduce the debt, the recent rate cuts would give the company a breather, at least till it finds a buyer for the stakes that it intends to offload.
PIPAVAV DEFENCE
The current debt of Pipavav Defence & Offshore Engineering Company’s (Pipavav) stands at 2,500 crore. The major portion of its debt was used for building necessary ship building infrastructure. The company has one of the longest shipyards in the world with the capability to build large-sized vessels. Although the company has world class infrastructure, its order pipeline is not encouraging. At present, it has an order book of 7,000 crore, which is quite low in comparison to its peer ABG Shipyard, which has an order book of 16,000 crore. Pipavav will not be able to repay its debt and post a decent growth with these orders. The company is banking heavily on the orders from the joint venture with Mazagon Dock. As on date, Mazagaon Dock has an order book of nearly 1 lakh crore and Pipavav expects some of these orders to flow to the JV. But the modalities of the JV are yet to be approved by the defence ministry. Without the deal, the company’s outlook looks bleak.
The current debt of Pipavav Defence & Offshore Engineering Company’s (Pipavav) stands at 2,500 crore. The major portion of its debt was used for building necessary ship building infrastructure. The company has one of the longest shipyards in the world with the capability to build large-sized vessels. Although the company has world class infrastructure, its order pipeline is not encouraging. At present, it has an order book of 7,000 crore, which is quite low in comparison to its peer ABG Shipyard, which has an order book of 16,000 crore. Pipavav will not be able to repay its debt and post a decent growth with these orders. The company is banking heavily on the orders from the joint venture with Mazagon Dock. As on date, Mazagaon Dock has an order book of nearly 1 lakh crore and Pipavav expects some of these orders to flow to the JV. But the modalities of the JV are yet to be approved by the defence ministry. Without the deal, the company’s outlook looks bleak.
SHIV VANI OIL & GAS
Shiv Vani Oil is India’s largest integrated service provider for onshore petroleum exploration and production. The services it provides include collection and analysis of seismic data, well logging, cementing, mud engineering, directional drilling, well testing etc till actual extraction of petroleum and well maintenance. The company’s debt-to-equity ratio stood above 1.9 at the end of September 2011, with the interest costs more than double its pre-tax profits in the first nine months of FY12.
The company has borrowed heavily in the past to augment its fleet of rigs and other equipment needed in the petroleum exploration business. However, its revenue growth failed to grow in line with the increased burden. In addition, increased interest and depreciation resulted in stagnat net profits in the last three years.
Shiv Vani Oil is India’s largest integrated service provider for onshore petroleum exploration and production. The services it provides include collection and analysis of seismic data, well logging, cementing, mud engineering, directional drilling, well testing etc till actual extraction of petroleum and well maintenance. The company’s debt-to-equity ratio stood above 1.9 at the end of September 2011, with the interest costs more than double its pre-tax profits in the first nine months of FY12.
The company has borrowed heavily in the past to augment its fleet of rigs and other equipment needed in the petroleum exploration business. However, its revenue growth failed to grow in line with the increased burden. In addition, increased interest and depreciation resulted in stagnat net profits in the last three years.
USHA MARTIN
Usha Martin is one of the largest wire rope manufacturers in the world. In order to expand its value-added steel capacity as well as its coke oven and pelletisation capacities to meet growing demand the company borrowed heavily. As on September 2011, its consolidated net debt stood at 2,726 crore, which is 1.5 times its equity. Its interest coverage ratio has been falling over the past three quarters and currently stands at 1.6, which is very low.
Its stock, however, has not reacted to the recent rate cut and is hovering at around 30, which is close to its 52 week low of Rs 28.9. This is because the company has other problems to deal with such as the sharp rise in raw material costs, which it is unable to pass on to its customers.
Usha Martin is one of the largest wire rope manufacturers in the world. In order to expand its value-added steel capacity as well as its coke oven and pelletisation capacities to meet growing demand the company borrowed heavily. As on September 2011, its consolidated net debt stood at 2,726 crore, which is 1.5 times its equity. Its interest coverage ratio has been falling over the past three quarters and currently stands at 1.6, which is very low.
Its stock, however, has not reacted to the recent rate cut and is hovering at around 30, which is close to its 52 week low of Rs 28.9. This is because the company has other problems to deal with such as the sharp rise in raw material costs, which it is unable to pass on to its customers.
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