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Top borrowers in FY02 - Views on News from Equitymaster
 
 
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  • May 22, 2003

    Top borrowers in FY02

    Capital is one of the key criteria that helps a company or an industry realize its growth dreams. For this, it either has the option of raising capital on its own i.e. within the company by way of internal accruals (cash flows, reserves) or through external sources (debt or equity). In continuation of our previous studies on the performance of companies on different parameters, we shall see in this article, which are the top indebted companies of India Inc. As usual, our study sample was the listed companies. Also, we did not include banks and financial institutions.

    The manufacturing industry is capital intensive, with huge investments required to set up efficient infrastructure or plant. These expenses have a bearing on the cash flows of the company, so in order to meet these expenses the companies resort to debt from external sources or raise capital from either the primary markets or through other instruments.

    Long term debt snapshot
    (Rs m) FY93 FY02 % CAGR
    Indian Oil Corpn. Ltd. 62,119 190,250 13.2%
    Reliance Industries Ltd. 26,205 189,285 24.6%
    Steel Authority Of India Ltd. 95,213 135,543 4.0%
    Ispat Industries Ltd. 3,587 63,556 37.6%
    Mangalore Refinery & Petrochemicals Ltd. 5,165 55,357 30.2%
    Jindal Vijayanagar Steel Ltd. 6,693* 49,697 25.0%
    Tata Iron & Steel Co. Ltd. 30,642 47,089 4.9%
    Indian Petrochemicals Corpn. Ltd. 18,036 42,016 9.9%
    Bharat Petroleum Corpn. Ltd. 3,256 38,457 31.6%
    Oil & Natural Gas Corpn. Ltd. 95,079 35,108 -10.5%
    Hindustan Petroleum Corpn. Ltd. 6,131 31,715 20.0%
    * over FY95

    Our study showed that the top borrowers in FY02 were petroleum (6) and steel (4) companies. Setting up a 1 m tonne steel plant requires a capital investment of Rs 2 bn and a 1m tonne refinery plant requires between Rs 5 bn to Rs 10 bn capex. Secondly, the gestation period of these plants is spread over 3-5 years, so the company’s ability to repay gets stretched. All these companies have thus turned out to be the top borrowers.

    But when one sees the table, steel companies have higher D/E ratios in FY02 as compared to petroleum companies. This is due to the slowdown and overcapacity situation in the domestic steel sector over the last few years. As the demand for steel products slowed down, these companies started to default on the repayment of debt. Their reserves also started to deteriorate as a result of which the networth of these companies has fallen significantly over the last few years. But such is not the case for petroleum and refinery companies, as the demand for their products have been consistently on the rise year on year.

    D/E stats
      FY93 FY02
    Indian Oil Corpn. Ltd. 1.3 1.3
    Reliance Industries Ltd. 1.0 0.8
    Steel Authority Of India Ltd. 1.8 6.0
    Ispat Industries Ltd. 2.6 12.7
    Mangalore Refinery & Petrochemicals Ltd. 1.7 16.1
    Jindal Vijayanagar Steel Ltd. 2.0 18.7
    Tata Iron & Steel Co. Ltd. 1.5 1.4
    Indian Petrochemicals Corpn. Ltd. 1.9 1.5
    Bharat Petroleum Corpn. Ltd. 0.3 1.0
    Oil & Natural Gas Corpn. Ltd. 1.1 0.1
    Hindustan Petroleum Corpn. Ltd. 0.6 0.5

    If you look at the CAGR of debt component, steel companies like Ispat and Jindal Vijayanagar Steel, saw there debt levels grow at a CAGR of 38% and 25% respectively in the last 10 years. The timing of their expansion could not have come at a worse time. Among refineries, though debt for Reliance, BPCL and HPCL grew at 20% or more in the last decade, their debt equity ratio has never grown out of hand, indicating that these companies were able to grow in proportion to the increase in their debt levels. It indicates that the expansion plans came at the right time.

    Among refiners too, there have been black sheep like Mangalore Refineries (MRPL), whose debt has grown at a CAGR of 30% plus in the last decade and its debt to equity stood at a worrying 16x in FY02. MRPL probably suffered owing to management sluggishness, as well as because it was a standalone refinery, not having the economies of scale that bigger players enjoyed. Situation for MRPL will hopefully be different in the coming years owing to its buy out to ONGC.

    In order to recover the debts from loss making steel companies, a debt restructuring programme was initiated in FY02, as during this period interest rates started to decline. To put things in perspective, average prime lending rates (PLR) in FY93 were around 16% but in FY02 they hovered around 12%. Secondly, the increase in demand for steel products from countries like China and US have provided a much needed fillip to the beleaguered steel majors in the country. So, with the PLR expected to fall further going forward and the demand buoyancy likely to continue, steel companies are in a better position to repay their debts. Of course, some of the lenders have converted their debt into equity.

    The next decade too is likely to see manufacturing companies dominating the debt list, but hopefully more prudence would be deployed by India inc. so as industries do not fall into debt traps. Of course, softer interest rates should help speed up repayment.

     

     

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