HIGH DEBT COMPANIES -NEED TO HAVE A RELOOK?
By Ruma Dubey
The RBI reduced rates and there is hope that it has finally begun the downward rate cycle. So when the rates were up, we shunned high debt companies and now if rates are coming down, do we need to relook at some of these high debt companies? These companies are sure to show some saving in the interest outgo and this in turn is sure to mean some improvement in the margins.
It does not mean that high debt companies are good but surely, they can see better margins once rates start coming down. And in this category, capital intensive companies, mainly from the infra sector stand up tall. Infra companies, which were the darling of the bourse a year or two ago, seems to have broken too many hearts and seems to have run into trouble itself. After announcing and getting into huge, sometimes, unrelated mega projects, the sheer weight of the debt seems to have kept these companies aground.
Most of the top rung infra companies are today sitting on huge debt. The highest debt probably is of JP Associates, which currently has a debt of Rs.60,000 crore. GMR Infra is sitting on long term debts to the tune of Rs.45,000 crore. This is amongst the biggest debt in the sector. Adani group debt of around Rs.78,000 crore. Lanco Infra is sitting on debt of Rs.36,000 crore.
Credit Suisse has put out a report stating that the aggregate debt of the top ten groups of India accounts for about 13% of total bank loans and a staggering 98% of the entire banking system net worth. Other high debt companies are – Jet Airways (Rs 10,895 crore), HCC (Rs 11,000 crore), DLF (Rs.20,337 crore), Unitech (Rs.6800 crore), Bhushan Steel (Rs.35,000 crore), Essar Oil (Rs.24,000 crore), GVK Power (Rs.22,000 crore), Alok Industries (Rs.20,000 crore), Suzlon (Rs.17,000 crore), Shree renuka Sugar (Rs.9500 crore). In the telecom, Bharti Airtel leads at around Rs.67,000 crore, Rcom debt is at about Rs.41,000 crore and Idea has a debt of around Rs.11,000 crore.
Capital intensive infra companies are currently the most caught in a tight bind. This falling rate cycle, if sustained will once again prompt the much needed PE funds into infra companies, valued much lower than two years ago, maybe attractive enough to buy into? Infra companies have been on the downward cycle for too long now and one hopes that the tide will turn for the better for these companies.
It would be too immature to rush into high debt companies just because of a 25 bps rate cut. Best it to wait and watch and keep a tab on these companies. Q4 numbers are surely not going to see any improvement, maybe we will see a better picture emerge from FY16.