Friday, November 07, 2014

A standalone debt figure, does not therefore necessarily indicate that a company is in trouble. The debt level, in itself, does not establish that a company is over-leveraged. One has to look at indicators such as debt-equity ratio, interest coverage ratio, etc. Capital intensive sectors such as infrastructure and capital goods usually have a debt-equity ratio above two, while for companies in software, the figure ought to be much less, below 0.5.

Interest coverage ratio is the company's operating profit divided by its interest cost. The ideal figure once again depends on the sector, but the lower this is, the more a company is shackled by its debt. An interest coverage ratio below one means the company's operating profit is not even enough to meet its interest cost, while a negative figure shows the company is making operating losses.

According to Prime Database, India Inc raised more than Rs.2,000 crore through QIPs in 2012/13 and 2013/14. Fundraising through QIPs has seen a significant jump this year with Rs.20,171 crore already raised so far.

In the mid-2000s, with the Indian economy galloping ahead, many companies embarked on ambitious capacity expansion ventures, including overseas acquisitions, largely funded by debt. But with the downturn, the global economy went into a slide and the domestic economy too followed suit after 2010, totally upsetting their business plans. Increasing difficulties in acquiring land for projects and getting environmental clearances compounded their problems.

Worst affected were companies in sectors such as capital goods, infrastructure, construction, power, and metals, which have long working capital cycles and gestation periods for projects; along with those in drugs and pharmaceuticals. The capital goods sector has seen debt grow at a CAGR of 23 per cent in the last three years. In 2013/14, debt levels increased 17 per cent over the previous year, from Rs.18,500 crore to Rs.21,500 crore. Debt in the metals' sector rose 19.7 per cent in the last three years; in the infrastructure sector by 12.7 per cent. Infrastructure companies' debt increased by 14 per cent in 2013/14, from Rs.5,000 crore to Rs.40,000 crore. The main reason is projects coming to a halt in the power and infrastructure sectors.

One of the means of means of reducing debt is selling off assets. A CRISIL report of July 2014 said 21 companies had announced 36 deals in the past 18 months to divest assets and sell equity to strategic partners which would raise Rs.80,000 crore - nearly a fifth of their total debt. Not surprisingly, 62 per cent of the assets sold will be by companies in the infrastructure sector. The report also estimates that another Rs.60,000 crore will be similarly raised in 2014/15.

These measures have started yielding results. CRISIL's credit ratio (ratio of number of companies showing credit quality improvement to deterioration) was 1.64 times for the first half of 2014/15 with 741 upgrades as compared to 451 downgrades. However, the ratio of the size of debt of upgraded firms to that of those downgraded (excluding financial sector players) was 0.59 times during the same period, showing persistent high debt levels.

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