Mumbai: The Reserve Bank of India’s latest move to raise the policy rate and squeeze liquidity from the system may not hurt Indian companies too much, even though commercial banks are already raising their lending rates. That’s because not too many Indian firms are highly leveraged.
The BSE 500, the index of the 500 largest companies by market capitalization, accounts for 93% of the value of Indian stock market universe of some 3,000 companies, worth Rs46.4 trillion.
But the analysis is only based on data available from 130 firms of the 500 listed entities that have announced their annual results for fiscal year 2008. Even from this group, commercial banks and finance firms have been excluded as debt to equity ratio doesn’t mean much for them since they are in the business of taking and lending money. Information technology (IT) firms, too, were not considered for this analysis as they are traditionally underleveraged.
Excluding finance and IT firms, the sample size was 87. Of this, just 21 firms have higher debt than equity.
Analysts say that debt to equity ratio is an ideal way of seeing the resilience of a firm in “bad times” when interest rates rise and liquidity in the system dries up. This measure of a company’s financial leverage is calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.
Those companies that use less debt to finance their assets are underleveraged and may not find it difficult to raise loans for capital expenditure and expansion at times when money becomes more expensive. Conversely, over-leveraged firms, or those with higher debt to equity ratio, will find it difficult to raise debt in such times.
However, there is no uniform norm for an ideal debt to equity ratio and it depends on the industry in which the company operates. For example, capital-intensive industries tend to have a higher a debt to equity ratio, often above two.
“If a company already has a high debt to equity ratio, it will be difficult to get easy money in this market,” said Prabal Banerji, chief financial officer of the diversified Hinduja group. “Depending on the capital structure of a company, a preferable route for any company which decides to go in for equity-linked capital raising route will be QIP (qualified institutional placements) or the GDR (global depository receipts) way.”
Chanda Kochhar, deputy managing director, ICICI Bank Ltd, India’s largest private sector lender, said that the hike in key policy rates will have an impact on liquidity and lending rates as banks will hike rates. “So far, corporations have funded their requirements through cash accruals and their profitability has also been healthy. But, this could change in the coming days,” she said.
However, a senior official of a rating agency, who does not want to be named, said Indian firms have the strength to withstand the pressure.
“Unlike in the mid-1990s when most of the firms were highly leveraged and diversifying their businesses, now most of the corporations are focused and underleveraged,” he said.
Prominent among the zero-debt companies are Cairn India Ltd, Praj Industries Ltd, Gillette India Ltd, Mysore Cements Ltd and Seimens Ltd.
The list of firms with less than one in debt to equity ratio includes Reliance Industries Ltd, Reliance Petroleum Ltd, ACC Ltd, Ambuja Cements Ltd, Aditya Birla Nuvo Ltd and Wockhardt Ltd.
Companies with high debt on their books, however, will have to spend more to service existing debt, and credit scarcity could close doors on additional funds required for their growth.
The declines in Dalal Street, which have also shrunk the valuations of such stocks, has already put a lid on options to raise funds from equity markets.
“Investors are better off away from stocks of highly leveraged companies,” said Nilesh Shah, chief investment officer of ICICI Prudential Asset Management Co., which manages around Rs33,594 crore worth of equity assets. The scarcity of credit availability will be a bigger blow for such companies than servicing existing debt, he added.
Spice Communications Ltd, which announced a merger with another listed telecommunications firm Idea Cellular Ltd on Wednesday, is the highest leveraged firm in the pack. Spice has 3.53 times more debt than its equity.
GTL Infrastructure Ltd, low-cost carrier Deccan Aviation Ltd, drug maker Strides Arcolab Ltd and Binani Cements Ltd are among other high-debt companies. All these companies have twice more debt than equity.
Sugar firms Shree Renuka Sugars Ltd and Bajaj Hindusthan Ltd, Hindustan Construction Co. Ltd, Adlabs Films Ltd, Thomas Cook (India) Ltd, Sterling Biotech Ltd and Ranbaxy Laboratories Ltd are some of the other highly leveraged firms.
“The repeated hike in bank lending rates have affected corporate capex (capital expenditure) plans,” said Asok Kumar, executive director, Axis Bank Ltd. There are no fresh proposals coming to banks, he said, adding: “The worst-hit sectors are the textile, real estate and auto ancillary, while small and medium enterprises are also affected as the cost of input and interest cost have both increased in the recent past.”
Ajoy Veer Kapoor, managing director of Saffron Asset Advisors, which manages half-a-billion dollar private equity funds focused on Indian real estate, also feels that the “strain from credit squeeze will be intense.”
The impact on real estate firms, which are in constant need of cash to complete projects, will be that some or many such firms may be forced to sell assets to raise money, he said.
Among stocks in BSE 500 that fall in this group are Kesoram Industries Ltd, Triveni Engineering and Industries Ltd, Pantaloon Retail (India) Ltd and Great Offshore Ltd.
Ankur Relia contributed to this story.