Nothing seems to have changed for domestic debt ridden companies, especially the ones operating in the infrastructure space, over the last one year. Despite the government’s assurances on revival of stalled projects that had become unviable for several companies to operate, their status has only changed for the worse.
A group of thirteen leading companies from the list of BSE 100 — that have already been reeling under high debt, rising interest expenditure and shrinking profits over the last few years — witnessed their financial strength weaken further in 2014-15. The situation is unlikely to improve soon as private sector investment and order flows are nowhere close to be taking off.
The prevailing situation not only raises a question mark over the future prospects and profitability of these companies but has also emerged as a cause of concern among the investors whose investments are stuck in these companies.
Reserve Bank of India Governor Raghuram Rajan, too, had recently hinted at the need for revival of stalled projects in the country. “Capacity utilisation has been falling in several industries, indicative of the slack in the economy. While an upturn in capital goods production seems underway, clear evidence of a revival in investment demand will need to build on the tentative indications of unclogging of stalled investment projects, stabilising of private new investment intentions and improving sales of commercial vehicles,” said Rajan.
Clearly there are no signs of improvement for majority of these companies except for a couple of them which have witnessed a marginal decline in their interest expense. In 2014-15, the aggregate interest expense for the group of thirteen companies jumped 19 per cent from Rs 41,028 crore in March 2014 to Rs 48,732 in
March 2015. However, during the same period their operating profit (profit before depreciation, interest and taxes) — contracted 29 per cent, thereby, reducing their ability to repay their debt.
Nine out of the 13 companies in the list have their interest expense to PBDIT ratio of more than 0.5 which means more than 50 per cent of the operating profit went into servicing of loan during 2014-15. The remaining four have the ratio between 35 and 50 per cent which is also on the higher side.
Except for DLF and JSW Steel, remaining 11 companies witnessed a rise in their interest expense to PBDIT ratio, which means their situation only turned grimmer.
As the situation worsened, three companies in the list — Vedanta, GMR Infrastructure and Jaiprakash Associates — saw their interest grow higher than the operating profit making it technically impossible for them to meet the expense costs from operations.
Within the list, companies that witnessed the maximum rise in their interest expenditure in FY15 were Jindal Steel & Power (74 per cent), Reliance Power (57 per cent) and Hindalco Industries (54.6 per cent). Even the aggregate borrowing of the thirteen companies rose from Rs 5.25 lakh crore to Rs 5.56 lakh crore during the year over the previous year.
Experts too accept that the situation has only turned bad. “Some of the companies had overextended and got into various sectors taking higher exposures. The situation has reached to a level where even sale of an asset is not making much difference. In case of Jaiprkash Associates, while the sale of asset did not result into a notable decline in debt, their cash flows went down because of the sale,” said the CIO of a leading mutual fund house.
The share prices of the companies too moved in line. While the benchmark Sensex at the Bombay Stock Exchange rose by 25 per cent in 2014-15, except for Vedanta which closed flat, all other 12 companies witnessed a decline in their share prices between 1 per cent and 54 per cent. The biggest fall was witnessed in share prices of Reliance Communications, Jaiprakash Associates and Jindal Steel and Power.
The 13 companies witnessed an aggregate decline in market capitalisation of Rs 52,000 crore down from 3.21 lakh crore as on March 31, 2014 to Rs 2.69 lakh crore on March 31, 2015.
What is needed
Over the last five months, the Reserve Bank of India has cut interest rates three times by 25 basis points each.
The cuts have, however, not been passed in the same proportion onto the lending rates of the banks. This was also pointed out by Rajan on June 2. “Banks should pass through the sequence of rate cuts into lending rates,” he had said.
Market experts point that a cut in lending rates may help improve the situation of some of these companies as they can then restructure their debt and that in turn will bring down their interest expense.
“For India Inc, one percentage point reduction in interest rates raises the profit after tax by roughly 7 per cent. So a cut in rates will bring down their interest expense and thereby improve their ability to repay,” said the CIO of the mutual fund.
Other than this, the unclogging of stalled projects is another area that needs to be looked into.
According to the Economic Survey 2014-15, the aggregate value of stalled projects at the end of December 2014 stood at Rs 8.8 lakh crore or 7 per cent of GDP and that manufacturing and infrastructure dominate in the private sector. The government’s stalled projects are predominantly in infrastructure.
“Unfavourable market conditions (and not regulatory clearances) are stalling a large number of projects in the private sector, and in contrast regulatory reasons explain bulk of stalling in the public sector. Also, clearing the top 100 stalled projects will address 83 per cent of the problem of stalled projects by value,” said the Economic Survey.
It further added that stalling of projects is severely affecting the balance sheets of corporate sector and public sector banks, which in turn is constraining future private investment, completing a vicious circle, characterised by an investment slowdown leading to less financing back to weak investment.
Therefore, a cut in interest rates and unclogging of the stalled projects may help these companies.
While there have been talks of private investment, experts feel that public investment will have to step in first to recreate an environment to crowd-in private sector investment in the short term and efforts should be made towards revitalising the public-private partnership model of investment in some form.
The Economic Survey also talks of setting up of Independent Renegotiation Committee. “In the presence of weak mechanisms for bankruptcy and exit, we have to think creatively about distributing pain amongst the stakeholders from past deals gone sour.”
In the meantime, experts advise investors to stay away from these companies till there is a clear roadmap for their revival.
“We have not been investing in these companies, however, there are many who are taking positions in them because of the drop in their share prices. Retail investors should look to avoid them for now as their situation will not improve in quick time,” said a fund manager who did not wish to be named.