Stress to service debt weighs on more Indian companies

Mumbai: More and more Indian companies seem to be under stress to service debt. As their cash flows dwindle, companies hold an interest cover of less than 1 against one-third of total corporate debt, according to a recent report by Credit Suisse .

An interest cover of less than 1 indicates that they will find it difficult to meet interest costs and service debt.

Of the $400 billion of debt held by 3,500-odd companies, both listed and unlisted, about 34% was with companies with low interest cover as of 30 September, compared with 31% in the preceding quarter, says the Credit Suisse report released on 19 November.

According to Mint research, nearly 15% of BSE-500 companies—that account for about 93% of the market capitalization of Asia’s oldest exchange—have an interest coverage ratio of less than 1 as of 30 September.

On an aggregate level for the companies constituting the BSE-500, the interest cover has dropped from 3.74 times in the September quarter of 2012 to 2.93 times in the same quarter in 2013. Total debt for these companies has increased 18% in the six months ended 30 September, from the corresponding period a year ago and 79% from March 2011.

Interest coverage ratio is used to determine how easily a company can pay interest on outstanding debt. It is calculated by dividing a company’s earnings before interest and tax for a specified period by the company’s interest expenses in the same period. The lower the ratio, the more the company is burdened by debt.

Companies are facing the brunt of a sluggish economic growth and a volatile currency that are taking their toll on operating margins, analysts say. Economic growth slowed to 5% in the year ended 31 March, the least in 10 years. Since January, the rupee has weakened 12.56%. Delayed government approvals have stalled many projects, hurting company cash flows.

Leverage across industries has considerably increased and profitability has declined, lowering interest coverage ratios, said Kishore Gandhi, chief credit officer at India Ratings and Research Ltd.

“In the last 12-18 months, the debt repayment capacity of companies hasn’t improved significantly. For many, it could be the same or even a shade worse,” Gandhi said. “As an economy, we need to get back on the growth track and the currency volatility has to change.”

From a lender’s point of view, it is a cause of worry, said Shishir Mehta, a partner in the banking practice at Khaitan and Co., a law firm. “But at the end of the day, it is a commercial business and if a bank believes in the long-term potential of the company, they might relax the covenants which talk about sufficient interest cover,” he said.

Many companies that are under the stress of servicing their interest have also eroded their net worth or equity and reserves in the past few quarters, the report says.

“For many of the cases where debt has been restructured, such as Suzlon (Energy) Ltd, Jindal Stainless Ltd, Hotel Leelaventure and Bharti Shipyard Ltd, erosion in net worth has increased the likelihood of large slippages to non-performing assets in coming quarters,” analysts Ashish Gupta, Prashant Kumar and Kush Shah wrote in the Credit Suisse report.

Other companies feature in the list are Tata Communications Ltd, GTL Infrastructure Ltd, Essar Oil Ltd and Adani Power Ltd.

The report says GTL has lost around 83% of its net worth between the 2011 fiscal year and the first half of the 2014 fiscal year. Its debt has increased by 5% in the same period.

But a GTL spokeswoman said the information on the erosion of net worth of GTL Infrastructure was incorrect. “GTL Infra has successfully completed the financial restructuring through CDR (corporate debt restructuring) and is now focusing on its business growth,” she said.

As of September 2013, the net worth for GTL Infra was Rs.1,311 crore compared to Rs.1,643 crore in the 2013 fiscal year. There may be an increase in the net worth by the end of this fiscal year, if certain instruments are converted into equity, the company spokeswoman said.

A spokesperson for Suzlon said in an emailed statement that the net worth was dented substantially in fiscal 2013, where their focus on liability management resulted in a near operational standstill, leading to a significant loss. It will continue equity infusion from lenders and promoters as part of its debt restructuring, the company said.

The erosion in the net worth is 79% mainly due to non-availability of sales tax benefits following a Supreme Court decision in January 2012, which accounts for 71% of the erosion, an Essar Oil spokesman said in an email.

Jindal Stainless said the impact of the global economic meltdown is still being felt by the company, coupled with domestic pressures. However, the company is confident and is gearing up to encash future market opportunities as they emerge.

The net worth erosion is mainly due to losses incurred by companies in recent times, according to India Ratings’ Gandhi. Many of the companies that have lost net worth belong to cyclical industries like automobiles, capital goods and commodities in which a loss is a part of the natural cycle, he added.

Ashwin Ramarathinam contributed to this story. m
md.aquil alam
pgdm ist sem 
source.live mint