Debt millstone gets heavier for India Inc

Top 10 biggest business groups reported a further deterioration in their debt servicing capacity despite gains from lower commodity and energy prices

High debt continues to be a drag on the fortunes of India’s top business houses.

During the financial year 2015-16, the country’s 10 biggest business groups (in terms of total debt outstanding) reported a further deterioration in their debt servicing capacity despite gains from lower commodity and energy prices.

The combined interest coverage ratio of these business houses declined to 3.7 from 3.9 in FY15. In other words, their operating profit was 3.7 times their combined interest payment last financial year against 3.9 times a year ago. The ratio was 7.7 times in 2010-11.

The combined operating profit went up 7.2 per cent year-on-year (Y-o-Y) in FY16, against the 2.4 per cent decline the previous year. The improvement was led by a 200-basis point increase in overall operating margins and 150 basis points increase in the core operating margins (excluding other income).

This was, however, negated by higher interest payments as companies such as Reliance Industries, Bharti Airtel, Idea Cellular, Tata Steel, Adani Power and Adani Ports raised fresh loans to fund new projects or assets purchases like telecom spectrum.

 

At an increase of 11.8 per cent Y-o-Y, the combined interest payment outpaced operating profit growth for the fifth consecutive year in FY16. The sample companies paid total interest of ~73,367 crore last year up 11.8 per cent over FY15. In comparison, their operating profit was up 7.2 per cent Y-o-Y to ~2.73 lakh crore in FY16.

The analysis is based on consolidated financials of the listed companies of the country’s top ten business houses in terms of gross debt outstanding.

The figures for FY16 and FY15 are unaudited, while the previous year figures are audited.

At the end of FY16, these groups were sitting on gross debt of ~10.3 lakh crore up 8.3 per cent on a Y-o-Y basis. Adjusted for cash and bank balances, net debt was 11.1 per cent higher last year — growing faster than both revenues and net worth leading to an increase in their leverage ratio.

The sample net debt to equity ratio rose to 1.11 last year against 1.09 in the previous year. The sample excludes financial services companies or holding companies such as Reliance Capital, Aditya Birla Nuvo and L&T Finance Holdings. The data has also been adjusted for listed subsidiaries of major companies such as Grasim Industries, Tata Steel, Tata Global Beverages, Indian Hotels and Tata Chemicals among others. Double counting, however, cannot be ruled out due to a web of cross holdings among the listed companies of various groups.

The business group in the sample includes Tata, Mukesh Ambani’s Reliance Industries, Adani, Aditya Birla, Anil Ambani, Vedanta, Bharti, Jaypee, OP Jindal and JSW Group. The Tata group topped the debt chart with the group companies’ combined gross debt of ~2.17 lakh crore up three per cent in FY16. Adjusted for cash on the books of group companies, they had a net debt of ~1.65 lakh crore last financial year up 13.6 per cent Y-o-Y.

The Mukesh Ambani group is second on the chart with total gross debt of ~1.79 lakh crore at the end of FY16 up 14.8 per cent Y-o-Y. Adjusted for cash on books, however, the group has a higher net debt than the Tata group. It is followed by Aditya Birla group with total gross debt of ~1.15 lakh crore last financial year up 23.2 per cent Y-o-Y.  

Companies in groups such as Mukesh Ambani, Anil Ambani, Adani and Vedanta, however, reported improvement in their interest coverage ratio due to a superior profitability of their key group companies.   

The data for around 2,700 non-bank and financials companies suggest that many of the country’s top conglomerates are financially more stretched than the average listed company in the country. The interest coverage ratio of the entire universe in FY16 was better at 3.86 unchanged from the previous year. At 0.80 times, the net debt to equity ratio for the universe is also better than the corresponding ratio for the top business houses. Experts attribute it to the presence of the bigger groups in capital intensive and currently, financially struggling sectors such as metals and mining, telecom, power and infrastructure.

“Many of these big groups have been adversely impacted by a global deflation in commodities and energy. Their fortunes are now closely tied to the global business cycle that remains challenging. Smaller business groups on the other hand are mostly present in low-capital intensive and consumer-oriented sector that have been least affected by the global economic turmoil,” said G Chokkalingam, founder and CEO, Equinomics Research & Advisory.

A high global linkage has made it tough for India’s top business groups to make a swift turnaround in their financial fortunes riding on domestic growth. The next few quarters hold the key to a possible turnaround in their balance sheet ratios.