Are these companies on the brink of insolvency? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are these companies on the brink of insolvency? 

A  A  A
In this issue:
» Is Indian economy better than what it was in 1998?
» Does India have a balance of payments crisis?
» Will the FM's measures help the Rupee?
» US dollar on shaky grounds
» and more....

The Indian economy had bedazzled the world with high economic growth till recent times. Economy was growing. Demand was on the rise. The best part about this growth was that it was supposed to be consumption driven. This made the company sort of insulated against external shocks. Everyone was happy. Even the companies. Most of them went on an expansion spree. And most of this expansion was funded by debt. The thinking was that the growth in earnings would help take care of the debt repayments. But now things have taken a turn for the worse.

The economy has slowed down. Investments are drying up. New projects are being delayed or postponed. And this has hurt the performance of the companies as well. As per a study conducted by Business Standard on the companies forming a part of the BSE 500, nearly one-third are in financial trouble. The leading daily has taken market capitalization to debt and debt to equity ratios as the main metrics for this study. As per the study, nearly 143 companies are currently trading at a market cap less than or a shade higher than their debt. This includes some of the noted names in the industry.

You may say that when stock markets are as volatile as what they are at the moment, this measure may not be appropriate for judging the financial health of a company. Therefore this measure needs to be read in conjunction with other financial numbers. But even then the picture is not too rosy. Most of these companies have debt to equity ratios in excess of 1. At the same time interest coverage ratios are less than 2 and declining. With demand coming under pressure, things are not expected to improve.

This is where the market capitalization to debt ratio comes into focus. Since their shares are losing value, investors have turned cautious when it comes to investing in these companies. Therefore these companies would find it difficult to raise equity to pay off their debts. The net result being that the financials of these companies could deteriorate further as the burden of interest would continue to weigh down upon them.

What we suggest is that investors should adopt a cautious approach when it comes to stock picking. Digging deep into the fundamentals and reviewing the risks has become even more crucial now than ever before. Only invest in stocks that have sound fundamentals and the strengths to weather the storm.

Which companies do you think can weather the tough economic scenario in India? Please share your comments or post them on our Facebook page / Google+ page

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01:20  Chart of the day
Since the Indian Rupee turned southwards, a lot of articles have started to crop up on how things are similar to what they were in 1998. 1998 was the peak of the Asian financial crisis when the rupee had come under pressure. The Reserve Bank of India (RBI) governor at that time had taken several measures including raising interest rates to arrest rupee's fall. At that time too India faced a slowing economy.

Jump to 2013, and things are eerily similar. This may make one get the sense of deja vu. As seen in the chart, the statistics show that at the moment things are actually worse than what they were in 1998. Barring GDP growth, which is expected to be around 5%, every other number paints a gloomy picture. Industrial growth has slowed down. The current account deficit (CAD) is worse. India's short term debt as a percentage of total debt has surged, which means repayments and interest would be a problem. Unfortunately because of the structural issues being faced on the policy implementation front, things are not expected to improve any time soon. At least on the domestic front. The export situation is no better either due to the depressed global economic scenario. Therefore unless the government can come up with some radical changes, the short term outlook for India is not very bright.

Source: The Mint

Last week the US dollar-rupee exchange rate hit an all-time low of Rs 61.8 per dollar. India has just US$ 280 bn of forex reserves. Enough to cover only seven months of import bills! This is the lowest import cover since 1996! This is also the lowest import cover among BRIC nations. Everything seems to be working against India. Foreign fund inflows are drying. As per an article in Firstpost, stock markets have witnessed net inflows of US$ 2.3 bn since April 2013. However, there has been an outflow from debt funds of about US$ 5.7 bn. In addition, India has to repay liabilities worth US$ 172 bn by the end of fiscal 2013-14. Given the limited forex reserves, the RBI does not have much ammunition to intervene in the forex market and curb the rupee fall. All this puts India's balance of payments position in a very precarious situation.

Are we in a state of economy as dire as 1991? This is a question that domestic investors, corporate and FIIs are constantly pressurizing the Indian government to answer. If not to soothe nerves, FM Chidambaram is expected to list out some measures to allay fears of further fall in the value of rupee. The government, in all likelihood, is going to stress that it is on top of things. Further it may even take measures to boost inflow of dollars. This may include dedicated non-resident deposit schemes, bond issues by PSUs, measures to attract sovereign wealth funds etc.

It may be recalled that in 1991 the government issued India Development Bonds through SBI. The bonds had raised a substantial US$ 1.6 bn. Again in 1998, it launched the Resurgent India bonds after the US sanctions on India in the aftermath of nuclear tests. Some such measures cannot be ruled out this time as well. Moreover rules for Real Estate Investment Trusts (REITs) could be in the offing to solicit foreign investment in India's real estate sector. Thus, the government's 'all is well' message may not be entirely true. However, one could expect some serious measures to arrest the rupee depreciation and trade deficit crisis.

The first half of 2013 saw the US Dollar appreciate against most global currencies. The key reason for the same was the strengthening American economy; which would taper off the Fed's QE program. However, off late the greenback's movement has been quite volatile. Especially against the top traded currencies of the world. After hitting its peak, there US Dollar has seen a reversal in trend over the past month. With the Fed's views on the American economy being quite shaky, there are expectations of the prolonged usage of the stimulus programs. Also, the US Dollar is being sold by investors on the back of poor economic data numbers being released. The Fed has stated that its cut back would only begin once the country's employment ratio improves substantially. But with the kind of subdued numbers being announced in recent times, the Fed will have to wait to curb the program. All eyes will be on the Fed's next move, which is scheduled for next month.

We recently saw the renowned PC maker Dell going private so that the company can focus on creating long term value. And not get sucked into meeting quarterly targets investors so strongly demand. Well, it looks like the Chinese outsourcing firms seem to be a taking a leaf out of Dell's book. For as highlighted by a leading daily, many of these firms are exiting US stock exchanges with the help of private equity firms. That these firms have poor corporate governance standards is of course one of the reasons they are looking to delist. However, what has also not lost on investors is the fact that delisting might give these firms an opportunity to increase their competitiveness.

It is common knowledge that unlike manufacturing, Chinese IT firms have not been able to create any significant impact of note. And they trail Indian IT firms by a huge margin. Thus, the delisting might give them an opportunity to work on their business model and emerge as a solid alternative to India based IT firms. Given the gap Indian firms have built up, mostly in US and Europe, the task is not going to be easy for the Chinese firms.

In the meanwhile after opening the day on a positive note Indian equity markets continued to trade above the dotted line. At the time of writing, the Sensex was up by about 160 points (0.9%). Barring Indonesia and Japan, the other Asian stock markets closed the day in the green as well with markets in China and Hong Kong leading the gains in the region.

04:55  Today's investing mantra
"If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored."- Peter Lynch
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5 Responses to "Are these companies on the brink of insolvency?"


Aug 13, 2013

Looks like u writers have enormous ability to make the economy sound extremely good and then extremely bad the very next second to suit ur motives,I still believe twas better 10 yrs back than what it was 20 yrs ago,and now it is better than what was 10 yrs back.over 2u



Aug 13, 2013

please analysis and tell reports monthly ones.


girish shah

Aug 13, 2013

just give me two recommendations that have worked for ur investors in 1 year ...... the cong and the industrialist have seen to it that the they take out the maxium money out of india as when na modi comes they know he will hound them like a rabid dog so u see the re at 62 now going to god knows where THE SAME MONEY WILL BE GIVEN TO INDIA AS TAX FREE LOANS IN TAX FREE BONDS ..india ki ungli india ke hi gaand mein dalenge( the best I could write)

Like (1)


Aug 12, 2013

Current economic crisis is solely due to expenditure on governance.Almost 70 % of revenue is spent on elected representatives and public servants.Excessive staff,high wages,low productivity and corruption is eating away all the revenue earned from tax payer.the govt have to take hard measures like reducing the staff ,their perks and preivelages and stringent laws to curb corruption. Deficit budget both at center and state to be stopped at once.
t j ethiraj

Like (1)

Anil Harolikar

Aug 12, 2013

Can you pl display the list of these companies whose market cap is less than the debt along with details like Debt equity ratio, Interest coverage ratio, EBITA margin, PE ratio , 52 week Hi and Lo and CMP.

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