Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
11,953.1531.65
Stock Analysis, IPO, Mutual Funds, Bonds & More

Debt-equity ratio of India Inc companies improving; good news for banks as threat of default eases

Indian companies have been busy cleaning up their balance sheets, trying to reduce some of their crushing debt burden before they go completely under.

, ET Bureau|
Updated: Jul 21, 2014, 11.51 AM IST
0Comments
With the looming threat of defaults and bad debt easing up a little, there could be a re-rating of the banking sector.
With the looming threat of defaults and bad debt easing up a little, there could be a re-rating of the banking sector.
Indian companies, especially those engaged in infrastructure development of the country, have been busy cleaning up their balance sheets, trying to reduce some of their crushing debt burden before they go completely under. With debt-equity ratios of the companies having undoubtedly improved, this is also good news for the banks that held their feet to the fire and insisted that they face up to the consequences of borrowing beyond their means.

With the looming threat of defaults and bad debt easing up a little, there could be a re-rating of the banking sector, especially since the indications of a revival in the economy bode well for lenders as companies get back to financial health and make repayments on time.

“Corporate de-leveraging has played out well so far, with more than $10 billion worth of assets already sold and another $5-7 billion in the pipeline,” according to a note by brokerage CLSA. Companies such as Jaiprakash Associates, Reliance Communication, Aban Offshore, GVK Power & Infrastructure, Lanco Infrastructure, IVCRL and Jet Airways have been able to reduce debt considerably either through the sale of assets and stakes, monetisation of assets and recently, after a spectacular run-up in the equities market, via capital raising. Jaiprakash Associates has raised nearly Rs 15,000 crore from the sale of assets until March and Rs 1,500 crore via qualified institutional placements.

The infrastructure company has a total debt of around Rs 70,200 crore. After the equity offering, its debt-equity ratio has come down to six as opposed to 6.8 times. Likewise, after the recent capital offering by Reliance Communications, its debt ratio shank by 0.2 to 1.1 times, while that of Aban Offshore reduced by 1 to 1.7 times and GMR Infrastructure by 1.1 to 4.9 times. “Outlook on cash flow has also improved, led by the project completions and regulatory clearances,” CLSA said.

“These factors coupled with raising of capital have eased concerns on debt servicing for large corporates.” De-leveraging has not only helped firms bring down their debt-equity ratio to a reasonable level, it has also helped banks such as ICICI, Axis and State Bank of India by arresting the deterioration in asset quality. “We believe corporate lenders are the best plays on deleveraging among the large corporates,” CLSA said.

“This can support a re-rating of valuations considering that most corporate banks still trade at a discount to retail banks and ICICI, Axis and SBI are our top picks.” In the past one year, Indian companies sold nearly $10 billion of assets — 64% of this accounted for by the infrastructure industry, followed by oil and gas, real estate and aviation. Besides, as the macroeconomic situation has improved in emerging markets and with sentiment on India improving, companies have also been able to reduce their debt through equity offerings. Indian companies have mopped up nearly Rs 17,000 crore from QIPs in the last two months. Indian companies have stepped up debt reduction on account of heavy pressure from the banking sector.

“Several debt-laden companies were not even able to service their interest costs and created a financial mess for the entire banking system. This is the prime reason for the asset sale of bigger corporate houses, orchestrated by their respective bankers,” said the head of research at an MNC brokerage house who didn’t want to be identified.

“In order to bring the impetus to the credit growth for corporates and also create incremental headroom for the credit growth, it became important to bring down the debt of several Indian companies.” Six big infrastructure companies account for debt of $40 billion. That’s equivalent to 5% of the total credit amount of the financial sector (bank and non-bank financial companies combined) and 8% of total corporate loans.

Infrastructure firms have inevitably been at the forefront of the debt reduction. In a reply to an ET query, a Jaiprakash Associates spokesperson said: “We had divested assets worth Rs 15,000 crore till March ’14 and have plans to divest one or two more power and cement plants till March 2015 to raise Rs 8,000-9,000 crore.” GMR Infrastructure also plans to cut debt sharply.

“We intend to reduce corporate debt by 40-50% (about Rs 2,000 crore) in next 18-24 month period through combination of options like recently completed QIP proceeds, listing of energy or airport businesses etc and we expect that the debt-equity ratio will further improve with fructification of the equity raising initiatives,” it said in an email.

Also Read

Online banking restored: HDFC Bank

RBI investigating 'net banking' breakdown at HDFC Bank

Share market update: Bank shares mixed; Yes Bank rises 2%

Stock market update: Private banks mixed; YES Bank gains 3%

Share market update: Bank shares mixed; Yes Bank slips 5%

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service