Home >companies >news >Indian companies’ credit quality shows signs of improvement

Mumbai: The credit quality of Indian companies, which had piled up record debt after a spending boom before the global economic downturn set in, is showing initial signs of improvement, according to the latest data.

A Mint analysis of the interest paying ability, ratio of rating downgrades to upgrades and cash-flow generation suggests that efforts by firms to cut debt are starting to show results.

The average interest coverage ratio of 389 companies on the BSE 500 index, excluding banks and financial companies, has improved to 5.1 times from 3.99 times a year ago, the first year-on-year increase in four quarters, according to the analysis. A year-on-year comparison is more relevant as it helps avoid cyclical aberrations.

Interest coverage ratio measures how easily a company can repay interest on debt. An interest cover ratio of less than one indicates that it will find it difficult to meet interest costs and service debt.

In addition, an analysis of around 2,500 publicly traded companies in India showed that the ratio improved to 2.5 times in the first quarter of the 2015 fiscal, the first year-on-year increase in the last 16 quarters, according to a 22 August report by Nomura Holdings Inc.

“Sectors like autos/cement have done well through the cycle but surprisingly interest coverage levels of real estate companies continue to hold up," analysts Adarsh Parasrampuria and Amit Nanavati said in the report.

Interest coverage levels of textile companies, which account for around 12% of stressed assets of the system, remained stable, the report said.

The Nomura analysis, however, has not considered the performance of under-construction projects. Stress, because of high debt, was weighing heavily on companies in the last few years, when economic growth in the country touched a decade’s low. Lower demand led to a drop in revenue and cash flows, making it tougher for some companies to make interest payments.

The improvement in credit metrics comes after global institutions, including the International Monetary Fund (IMF), warned that the high-debt situation posed a risk to India’s economic stability. In April, IMF had said in its Asia-Pacific economic outlook report that a third of Indian companies had a debt-to-equity ratio of more than three, the highest degree of leverage in the region.

Another indicator that is pointing to an improvement in the credit quality of the Indian corporate sector is the number of credit rating upgrades in recent months. Rating upgrades are finally matching downgrades, if not surpassing them, according to data from rating company Crisil Ltd.

“Things seem to have got better for Indian corporates compared with the second half of 2013 and we are seeing the trend of companies recording equal upgrades and downgrades as of June quarter compared with more downgrades since 2012," said Ramraj Pai, president and business head, large corporates, at Crisil.

In 2013-14, Crisil had upgraded 953 firms’ ratings compared with 1,186 downgrades. In 2012-13, it upgraded 699 companies and downgraded 1,100 firms. The company does not provide a quarterly report on the number of upgrades and downgrades as it would include fewer companies and there could be aberrations because of seasonality.

“Some corporates are selling assets to deleverage their balance sheets and improve their cash flows and re-financing, which is having a salutary impact on corporate health," Pai said.

Asset sales among corporates are continuing. In the first four months of the current fiscal year, companies have put more than 17,000 crore worth of assets on the block, Mint reported on 2 August.

Companies including Jaiprakash Associates Ltd have embarked on ambitious plans to pare debt. The Jaypee group plans to halve its current borrowing of around 60,000 crore by the end of the current fiscal year, chairman Manoj Gaur had said in May.

A Jaypee Group executive, requesting anonymity, said the debt-reduction measures are helping group companies retire high-cost debt.

“The group has taken a series of initiatives to reduce total debt of over 60,000 crore by selling assets. The market is looking up and valuations seem to be reasonable. We will be in a better position to service debt post the closure of hydropower asset sale to Reliance Power Ltd," he said.

Apart from asset sales, many companies with high debt have also raised equity through the qualified institutional placement (QIP) route in the last few months, reducing their leverage.

“Some companies that had bought debt-financed projects have sold off part of their assets to improve their debt-servicing ability and many companies have withdrawn from projects that were stuck for many years," said Jitendra Sriram, director and head of research at HSBC Securities and Capital Markets (India) Pvt. Ltd.

On 14 August, Lanco Infratech Ltd sold a power plant in Udipi to Adani Power Ltd for 6,000 crore, the proceeds of which it will use to reduce debt.

Meanwhile, companies are also generating healthy cash flows from operations. A Mint analysis of cash flows from operations of 239 from the BSE 500 firms, excluding banks and financial institutions, shows that in 2013-14, these companies on an average generated 34% higher flows from operations, compared with the previous financial. This growth was the highest in four years.

“The credit environment has improved substantially in the past few months and we have seen an increase in the cash flows of Indian corporates and their equity raising capacity has also gone up," said Santosh Kamath, chief investment officer at Franklin Templeton Asset Management (India) Pvt. Ltd.

What is helping the cash flows is that a lot of projects that started in the 2008-10 period are now becoming operational, according to HSBC’s Sriram.

Corporates have also started tapping the bond market after a brief lull, which is helping reduce the cost of borrowing and easing pressure on immediate cash flows, as principle payments happen only at the time of maturity of the bonds.

“Investors are getting into the riskier corporate bond market because of the yield compression and companies are also tapping the overseas bond market because the rupee is stable and that is also helping in de-leveraging," Sriram said.

Companies have raised a total of around 30,000 crore in the past 2-3 weeks from the corporate debt market, according to bond dealers.

P.R. Sanjai contributed to this story.

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