The total debt of India’s top 500 companies in FY 2008 grew by over 11 per cent to Rs 5,54,380 crore,which will be a major concern for the leveraged firms as servicing this debt would be challenging,research firm Dun & Bradstreet said.
“In FY’08,the overall debt level for India’s top 500 companies increased significantly,thus adding to concerns,particularly in the midst of the current economic downturn in the global as well as domestic markets. Low-leveraged sectors are likely to fare better than the rest,” said D&B Chief Operating Officer Kaushal Sampat.
Further Sampat said “low leveraged sectors such as FMCG,electrical & electronic equipment and engineering & capital goods,will be comparatively better placed to tide over the current economic crisis,as companies from these sectors have reasonable amount of total cash.”
Moreover,D&B added,an analysis of the top 437 companies results for the nine-month period (April-December) during FY’08 and FY’09 gives a clear indication of tough times ahead.
The balance sheets of these companies got stressed as profit numbers were hit during the April-December 2008 period due to the rising interest outgo Sampat said companies had opted for higher debt in FY’08 and the preceding years,in order to execute expansion plans and to meet working capital needs during the boom period.
But the situation has changed dramatically ever since,today cash flows are locked in inventories,demand has dried up significantly,there is lack of funding options amid the global credit squeeze,and slump in equity markets,D&B said.
“As the companies opted for higher debt in the last few years for various reasons. The impact of these debts is now being felt. The interest expense for around 437 companies has increased by 82 per cent for the period April to December 2008 over the same period last year,” it said.
Amid such a scenario,low leveraged firms would fare better in this downturn because of their low debt condition higher EBIDTA and higher net profit margin,Sampat said.
High leveraged companies were from sectors like cement iron and steel,textiles,sugar and food and agro processing. Over 60 per cent of this group were small-cap companies,which had less accumulated cash to use for operational purposes.
Sampat said “though the high leveraged companies raised a high level of debt to fund their expansion plans,in the current slowdown and low demand scenario,the returns from these projects may not be too attractive.
Besides,some projects may come to a standstill,which will pose a threat to these companies,the research firm added.