At a time of economic slowdown and rising non-performing assets (NPAs), Indian companies managed to reduce their debts in the year ended 31 March. And, the good news is that the proportion of debt of leveraged companies to the total debt in the listed universe comprising over 3,300 companies has come down drastically and is the lowest in a decade.
According to Capitaline data used for this analysis, the debt in leveraged companies as a proportion of total debt in all the listed firms, that is, debt-to-equity ratio above two and a negative net worth, is down to 9.4% in FY2016, almost a fourth of what it was about 12 months earlier. Negative net worth implies that debt is more than what the business itself is worth and debt-to-equity ratio above two signals liabilities more than twice the value of its stock. Risk of repayment of loans for these companies is high.
Such trends are more pronounced during an economic downturn, when prolonged operating losses hurt the ability of a company to repay loans.
For example, in FY2009, following the Lehman crisis, the debt on books of companies increased (see chart). Again in FY2014, data tells that the proportion of debt of highly leveraged firms had risen to comprise nearly half the total debt in the period.
What’s interesting is the dramatic drop in highly leveraged firms in FY2016. How did this happen? As revenue took a beating due to lower demand across sectors and debt servicing through cash flows became tough, firms deleveraged their balance sheets through sale of non-core businesses or assets. Perhaps, some were forced to do this. Therefore, asset sales gained traction in the last two years. Real estate and construction firms, which were most affected by the slowdown, divested stake in some assets. This was reflected in the fact that the highly leveraged firms’ ratio fell dramatically in these sectors. Even the metals and real estate sectors showed an improvement in debt profile.
That said, a report by Nomura highlights that with the underlying demand in these sectors being still low and with policy hurdles and long gestation lags, the pace of improvement in deleveraging may take time from current levels.
Meanwhile, this doesn’t mean that the total debt of companies in the listed universe has come down. In fact, it has doubled.