Mid-caps pay for borrowing binge

Had India's hundreds of mid-cap firms aggressively cut their massive debts acquired in the boom years after the 2008 global crisis, their shares might not have dropped as precipitously in today's uncertain economy.

India's mid-caps are largely concentrated in the industrials, materials, utilities and energy sectors - the very sectors that had borrowed heavily to help grow Asia's third-biggest economy in the last few years.

Their debt-to-equity ratio averages 1.5, higher than those of small caps and bigger companies.

Infrastructure firm Jaiprakash Associates Ltd is the most indebted mid-cap, with almost $10 billion of liabilities. Its shares have dropped 56% this year.

A Thomson Reuters study of 282 mid-caps - or companies with market capitalisation of more than $100 million but less than $1 billion - showed the firms had cut their total debt by just 3% to $85.9 billion in the year ended in March. That's less than half of the 7% reduction in the previous year.

Some of the most indebted mid-caps in fact have become even more leveraged: IL&FS Transportation Networks Ltd increased its debt by 19% in the last fiscal year. Analysts say these companies will come to rue their failure to be more fiscally disciplined. The economy is still struggling as evidenced by dismal corporate earnings. Yet the Reserve Bank of India (RBI) has said it would hold off on cutting interest rates further, concerned that weaker-than-expected monsoon rains would push up food inflation. The central bank has cut rates by a total of 75 basis points since January.

Shares of Jaiprakash Power Ventures Ltd have fallen 52% in Mumbai trading this year; KSK Energy Ventures Ltd is down 42%; and Lanco Infratech Ltd is 33% lower.

"They are not able to cut debt as fast as the market is expecting," said G. Chokkalingam, founder of Equinomics, a Mumbai-based research and fund advisory firm.