Rising Rates May Add To India Inc’s Debt Woes

A debt build-up in FY11 could return to haunt India Inc. Interest rates are on the rise and are set to make a bigger dent in Corporate India's profits
An analysis of the balance sheet data available for 303 companies from the BSE500 group, excluding banking and finance companies, shows over half of them raised their debt level in FY11, while only a third of them managed reduce it. The quantum of debt raised by them was nearly five times the debt repaid by the latter group. Public sector oil retailer Indian Oil raised the most debt in FY11 at Rs 8,168 crore. Apart from work at its Paradip refinery, IOC's compulsion to sell oil below cost and the government's delay in compensating it for this forced the company to draw more debt. Adani Power, Bharti Airtel, Power Grid Corporation and NTPC were the other large borrowers.
A few companies ended FY11 with higher debt, but grew their cash balance by an even larger margin. For example, Reliance Industries' debt increased by Rs 4,069 crore, while its cash balance zoomed by Rs 13,673 crore. If its interest outgo increases, it will also earn higher other income on its bank balance. ONGC, Oil India, IRB Infra and JSW Steel are other such examples. Increased debt by itself is no worry if the balance sheet is strong and cash flows are sufficient to comfortably pay interest instalments.
The ratio between net debt - debt adjusted for cash balance - and equity gives an overview of how leveraged a company's balance sheet is. Among the BSE500 lot, Asahi India Glass appears the most leveraged with net debt 6.9 times that of equity. Jet Airways, JSL Stainless, Varun Shipping and Kesoram Inds are other companies with the leverage ratio higher than 3.
Rising interest costs will hurt more if companies are not generating sufficient profits to pay for them. The operating profit of Kingfisher Airlines, for example, was a fraction of its interest obligation in FY11. There were atleast six more such companies. (Refer chart) But one should not assume the scene is bad for everyone. Companies like BPCL, Adani Enterprises and Bajaj Auto were among the leading players to cut down their debt burden. Kingfisher’s debt restructuring brought its debt burden down substantially, although it is still 2.8 times its equity. Increasing rates together with rising debt burden and weak earnings are likely to form a dangerous concoction for some. However, there are companies thriving in this challenging environment, and should find preference with the investors.