NOT A GOOD TIME TO BET ON HIGH DEBT COMPANIES
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. The Tata group probably has more debt that all companies put together.
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.
While getting into high debt companies just because rates are coming down is a silly idea, it would instead be a good idea to look at companies, which during these difficult times have actually reduced their debt.
In this category, Indian Oil, thanks to the falling crude price and reduction in subsidies has reduced debt to the tune of Rs.28,000 crore. HPCL reduced Rs.13,000 crore and BPCL by Rs.4500 crore. RCom, has actually done pretty well, bringing down debt by Rs.15,000 crore but it continues to remain in the high risk category. Videocon also topped the list by reducing debt by Rs.6400 crore but it is borrowing afresh to invest in Brazil.
It would be too immature to rush into high debt companies just because rates have come down now. Best is to wait and watch and keep a tab on these companies. Q2 numbers are surely not going to see any improvement, maybe we will see a better picture emerge from H2FY16. Even today, zero or low debt companies are the best bet as these deleveraging and high debt companies would take a while longer to catch up with a growth story. Cash rich companies are the best deal today…but that is another story!