The financial stress faced by the top 10 Indian business houses has intensified despite attempts at deleveraging by a number of these groups by cutting back on capital expenditure and attempts to sell assets, according to a Credit Suisse Group report. Titled House of Debt, the report is an update of its first report on this issue in 2012 that listed the 10 most indebted corporate houses in India — Lanco Group, Jaypee Group, GMR Group, Videocon Group, GVK Group, Essar Group, Adani Group, Reliance Group, JSW Group and Vedanta Group.
The debt at these groups has risen seven times over the past eight years, with their loans adding up to 12 per cent of the loans in the banking system in India and 27 per cent of corporate loans, Credit Suisse said.
The brokerage house noted that the 10 ‘House of Debt’ groups saw their respective debt levels increase by 5 per cent in fiscal 2014-15 (FY15) and up 12 per cent since the last edition of the report which was released in 2013.
“All the groups saw further rises in debt in FY15, which is now up 7x over past eight years to (around) 12 per cent of system loans,” the report noted.
Credit Suisse further said that while their loans are still “standard” at the banks, in past few weeks close to 35 per cent to 65 per cent of debt of four groups — Jaypee, Lanco, Essar, and GMR — has been downgraded to default by rating agencies.
The interest cover — a gauge of a company’s ability to pay interest on its outstanding debt – of these corporate houses dropped to 0.8 in fiscal 2014-15 compared to 0.9 in FY14. As per the report about 80 per cent of the debt is with groups that had debt/EBITDA ratio greater than 6 in FY15 and nearly half with groups where interest cover remained below 1. The future looks bleak as well given that while interest cover is less than 1, a substantially larger part of P&L interest is still being capitalised.
Efforts of some corporate houses to cut back on capex and asset sales notwithstanding, the debt to EBITDA ratios of Jaypee and GMR groups have deteriorated further as they had to let go of relatively better assets as a part of their de-leveraging drive. As per the brokerage house some of the sold assets contributed as much as 70 per cent of EBITDA.
According to the report, given the high commodity and forex exposure, the financial stress for most of the groups is set to intensify. “Most of the groups have high exposure to commodities and downswing here adds to their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international coal mine acquisitions. In addition, with 15-60 per cent of their debt being in foreign currency, their debt servicing outlook continues to be of concern,” added the global investment bank.
It estimates that up to 20 per cent to 90 per cent of debt for some of these groups — aggregating to $48 billion and equaling almost all of gross non-performing assets in the banking system — is now facing severe stress. Including this, total stressed loans of Indian banks would be at around 17 per cent.
For investors, keeping off companies that are already stressed due to overleverage could be a pertinent stock tip. Especially those that have seen their debt overhang worsen over the last two years.