Top family-owned business groups continue to struggle

The debt woes of India's top business houses are not over even 8 years after the Lehman crisis and their profit growth remains anaemic

Eight years after the global financial crisis in 2008 that sent the world economy into a recession and financial markets in a free fall, top family-owned business groups continue to struggle with high debt and poor profitability. In many instances, these diversified conglomerates are in worse shape than they were five years ago.
 
Combined debt for the country’s top family-owned groups has grown faster than their revenue and operating profit in these five years, leading to a steady decline in their financial ratios even as growth and profitability remain lacklustre.
 
At 0.9 times, the combined net debt to equity ratio for the top 10 family-owned conglomerates by revenue was at a five-year high in FY16. Revenue reported a drop, and the net profit, adjusted for exceptional gains was up a modest three per cent in the previous financial year.
 
The data also show that most groups are now disproportionately depend on their star performer to keep their head above water. For example, the Tatas depend on cash from Tata Consultancy Services; Reliance Industries relies heavily on its refinery and petchem business while UltraTech Cement is the rock-star in the Aditya Birla Group. In Mahindra, the farm equipment division is the group cash cow; Vedanta relies on cash from Hindustan Zinc.
 

The analysis is based on combined financials of the country’s top 10 family-owned conglomerates ranked by their revenue in FY16. It includes groups such as Tata, Mukesh Ambani (Reliance Industries), Aditya Birla Group, Mahindra, Vedanta, Adani, Anil Ambani, JSW group, Bajaj and Murugappa group.  The analysis is based on the listed companies of these groups, excluding their financial services firms. The sample also excludes listed subsidiaries of listed group companies, to avoid double counting. The analysis is restricted to diversified groups and excludes sector-specific family-owned enterprises such as Bharti Airtel, Motherson Sumi and Sun Pharma, among others.
 
Companies in the sample, reported combined net profit (adjusted for exceptional gains and losses) of Rs 80,103 crore in the previous financial year, marginally up from Rs 74,226 crore in FY12. Combined operating profit was cumulatively up 50 per cent during the period from Rs 1.71 lakh crore in FY12 to Rs 2.58 lakh crore in the past financial year. Most of this was, however, eaten up by debt servicing, leaving little on the table for shareholders or future investments.
 

Interest cost for the sample has grown at a compounded annual growth rate (CAGR) of 22.4 per cent during the period, while their gross and net debt doubled during the period growing a CAGR of 16.5 per cent during the period.  At the end of FY16, these 10 groups’ had a combined gross debt of Rs 9.8 lakh crore on their books, up from Rs 4.6 lakh crore in FY12. Adjusted for cash and equivalents on their books, net debt during the period grew from Rs 3.1 lakh crore to Rs 6.8 lakh crore. They attribute it to a slump in the global commodity cycle and borrowings to fund large capital expenditure in the past few years. Combined fixed assets for the sample doubled during the period.
 
Analysts, however, say that not all debt went for capex. “Many companies also borrowed to fund their current operations or plug gaps in their cash flows. They were betting on future growth to take care of liabilities but a delay in recovery spoiled their plans,” says Dhananjay Sinha, head — institutional equity, Emkay Global Financial Services.
 
He expects an improvement in the financial ratios of business groups in the near-term to a mild demand recovery in the domestic economy. “There could be slight improvement in the profitability of these groups over the next
 
12-18 months but it might not be enough to solve their financial woes, given their size. They have no option but to exit some of the struggling businesses, just as second tier groups are being forced to do by banks,” he adds.