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Column : India Inc desperate for cover

A glance at the balance sheets of corporate India shows an alarming increase in the levels of borrowings.

A glance at the balance sheets of corporate India shows an alarming increase in the levels of borrowings. Perhaps policies were not quite expected to come apart the way they have but the resultant sharp fall in industrial growth has left several business houses up to their necks in debt. One number puts this in perspective: a study by Credit Suisse (CS) shows that the ten groups that have been the top beneficiaries of bank loans, in the past five years, have an average group debt to Ebitda (earnings before interest, tax and depreciation) of a high 7.6 times. More worrying, as the CS study shows, four of the ten have an interest cover (Ebit/P&L interest cost) of less than one. Some of this is due to the largesse of banks who, between 2006 and 2008, let India Inc borrow aggressively.

Companies, for their part, also accessed cheap overseas liquidity, at times to fund acquisitions overseas before the subsequent slowdown, post the Lehman crisis in late 2008, forced them to manage their money better, by shedding flab and trimming inventories.

The rally in the stock markets that began in mid-2009, after the second UPA government was elected, and which saw the Sensex hit lifetime highs, helped many companies rebalance their gearing; they sold shares at better valuations and were also able to whittle down their borrowings by selling off peripheral businesses.

Since then, however, with the economy on a down-trend and the markets in a lull, equity has been hard to come by. Among the few meaningful equity issuances was Tata Steel?s follow-on issue of just under R4,000 crore in January 2011.

In the meantime, the pressure on cash flows is building up and has put a question mark on how effectively companies will be able to service their debt. The increasing number of companies asking for more lenient repayment terms is a sign of how stressed cash flows are. Much of the pain has been caused by uncertain policies and a serious shortage of key resources; a shortage of gas, for instance, pushed infrastructure firms GVK Power and GMR Infra into the red in the June quarter. GVK?s balance sheet, which now has a debt of close to R14,000 crore, will continue to be strained; while the interest bill could rise some 50% to around R700 crore, cash flows too could be stressed since the shortage of gas will hit power generation. The weak business environment is clearly hurting: GVK?s pre-tax profits at the Mumbai airport business halved in the three months to June 2012 as revenues stayed flat.

At Adani Enterprises (AE), operating cash flows were subdued last year at just over R400 crore and the profit numbers would have looked a lot worse had all the finance costs been charged to the P&L account; much of it was capitalised. With the situation in the power space not likely to improve in a hurry, the company would be hard pressed to generate cash. As the CS report points out, the debt to Ebitda ratio for AE is a high 13.9; net debt rose to just short of R63,000 crore at the end of March, 2012, twice that of a year before. Reliance Communications? net debt has now crossed R35,000 crore and although it has been trying, for nearly two years now, to monetise some of its assets, among them a telecom tower business, it hasn?t succeeded. Operating cash flows at the telco, which were around R5,800 crore last year, could come off to as little as R2,800 crore this year since the market is getting increasingly competitive.

Cash flows from operations at Reliance Power are expected to fall to R850 crore this year, nearly half of the R1,407 crore generated last year, whereas the company?s long-term debt is expected to go up to R25,500 crore from R18,000 crore last year; interest costs could rise to around R500 crore from R300 crore last year. Another company carrying a huge debt burden, of R14,500 crore, is Essar Oil and analysts are convinced that forex losses and higher depreciation will keep the firm?s cash flows in check for the next couple of years. The CS study puts the Essar group?s exposure at close to R93,000 crore.

All in all, many of the country?s top business houses are leveraged to the hilt so its? not surprising that planned fixed investment in new projects by large companies dropped by almost half to R2.1 lakh crore last year from R3.9 lakh crore in the previous year, as RBI pointed out in its annual report. The fall, RBI said, was led by a drop of 52% in infrastructure investment. The pertinent point that RBI makes is that existing investments are at risk. Unless the economy revives dramatically, India?s banks are staring at some more restructuring or bad loans. And while it?s a little late in the day to worry about money already lent, the central bank may want to revisit prudential limits to companies and groups, currently at 15% of net worth and 40% of net worth respectively. They seem to be way too lenient.

shobhana.subramanian@expressindia.com

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First published on: 27-08-2012 at 02:39 IST
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