With the equity markets on a roll and stock prices at multi-year highs, it is not surprising companies are once again readying to raise equity; one early bird Idea Cellular has picked up
R3,000 crore through a placement to institutions while others like Larsen & Toubro are arming themselves with approvals from shareholders to be able to access the markets at what are clearly top dollar valuations. Estimates of R40,000-50,000 crore or more being mopped up this year might seem a trifle exaggerated but going by the mood in the markets right now, it could be possible even though this is twice the amount that companies picked up in FY13 and three times that in FY14. Foreign funds do seem to have an unsatiable appetite for Indian stocks while Life Insurance Corporation typically pumps in R25,000-30,000 crore even in a bad year. However, given how fickle foreign flows can be, and how quickly the sentiment can turn, companies would be advised to take what they get without haggling too much over the price. More so since the financials of a host of companies remain, if not precarious, very strained.
Research from Credit Suisse points out that with operating profits under pressure, the debt-to-ebitda levels for India Inc have risen in FY14; for the top 50 companies, that have an interest coverage of less than one, the median debt-to-ebitda has moved up to 10X while for companies whose loans have been restructured, the median debt-to-ebitda was even higher at 12 times. Ironically, the stock prices of many of these companies have actually doubled even as the state of their balance sheets has worsened. However, even while companies have talked of de-leveraging, not too much of this has happened. The same CS research highlights that for the 50 largest borrowers with an interest cover of less than one, debt levels went up by 7% last year even as the ebidta dropped by 9% resulting in the debt-to-ebitda ratio deteriorating to 14.6X from 12.3X. Some infusion of equity will no doubt help strengthen companies? financials and perhaps ease interest payments but until the business environment improves, cash flows are likely to remain under pressure. However, better-looking balance sheets should catch the attention of Private Equity (PE) investors who are scouting for good opportunities. Much of the $10.4 billion invested in 2013 may have gone into the IT and pharma spaces but there is enough appetite for companies that are not too indebted and run a sound business. At reasonable valuations, of course.
