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  • Jun 16, 2022 - 4 Indian Companies with a High Debt Problem. Could these Stocks Collapse?

4 Indian Companies with a High Debt Problem. Could these Stocks Collapse?

Jun 16, 2022

4 Indian Companies with a High Debt Problem. Could these Stocks Collapse?

Businesses in India continue to struggle to resume full-fledged operations despite the gradual easing of lockdown restrictions.

This could be a reason why the financial year 2022 may witness a Rs 1.7 tn debt from the top 500 debt heavy private sector borrowers.

Then came the war between Russia and Ukraine at a time when corporate India was at a revival stage.

India Inc cannot escape the throngs of the conflict. Analysts estimate the total risk of debt to be approximately Rs 1.2 tn for small and medium enterprises (SMEs). Micro or lower rated units may be worse off.

The war has been pushing up prices of crude oil, metals, gas and edible oils which has rattled the markets. The Reserve Bank of India (RBI) has also hiked rates several times over the last few months.

India Inc's Debt Burdens

Core profit growth at India's top companies has registered a decline.

Analysts predict that there is a high probability that corporate debt is likely to increase in the foreseeable future as Q4 results hint at a slowdown. Upcoming quarters may be sluggish adding to an already stressed out balance sheet.

To address this, corporate India has already taken a massive step toward repairing its balance sheets. The first act of business is to bring down the debt to equity ratio.

A massive deleveraging exercise was undertaken that brought down the ratio to 0.6 in the fiscal year 2021, the lowest ever in the last six years. The priority among corporates is to have leaner balance sheets and hence the focus shifted to repaying loans instead of amassing debt.

In the financial year 2020 - 2021, around 750 companies have reduced their gross debt by Rs 3 tn. Sectors that top the list include refineries, steel, textile, fertilisers, and power generation.

That said, the revival of the balance sheet continues to elude these 4 Indian companies that seem to have a debt problem on their hands. They are increasing their total debt to equity ratio at a consistent pace for the past five years.

As the US Fed raises interest rates, this could signal the end of the accommodative policies that markets have enjoyed so far.

The US Fed raised interest rates by 75 basis points (bps) yesterday, in the boldest move since 1994.

The impact of this action is likely to trickle down to companies across the globe. Especially those that are highly indebted.

Can this be a prime reason for their collapse? Let's find out.

#1 Swelect Energy Systems

Founded in 1994, the erstwhile Numeric Power Systems was rechristened as Swelect Energy and has been a dominant player in the energy space for over three decades.

The core expertise of the company lies in the manufacturing and trading of solar power and wind power generation.

Swelect is now a reliable Engineering Procurement and Construction (EPC) partner and a trusted Independent Power Producer (IPP) offering the best in class installations in the region.

With a market capitalisation of Rs 4.8 bn, the company registered a 30% year on year (YoY) turnover growth in the fiscal 2021.

Despite the uptick in revenue, the company's most recent return on equity (ROE) was a substandard 3.6% relative to its industry performance of 10.6% over the past year. This could indicate inefficiency in asset management and operation to its peers.

Over the last 5 years, the debt to equity ratio for Swelect Energy has been 0.3x-. The industry average is 0.2x. Since 2017, the debt to equity ratio has increased from 0.2x to 0.5x.

5 Year Debt to Equity Ratio - Swelect Energy Systems

2017 2018 2019 2020 2021
0.16 0.29 0.27 0.31 0.48
Data source: Ace Equity

The overall debt of the company stands at Rs 2.7 bn. At the current levels of operating cash flow, the company will be able to satisfactorily cover the company's debt. However, it is not enough to cover the interest payments on the debt.

But the debt to equity stands below the danger mark of 1, which is a good thing.

The stock is currently trading at Rs 315. According to market analysts, the stock is at a premium valuation at this point. This has been the case for quite a while.

Several brokerage firms have downgraded their ratings for this stock as a result of the company's debt coverage metrics.

Despite the credit challenges, Swelect has diversified business segments that offer more revenue streams for the company going forward.

Favourable policy developments by the government of India specifically for domestic module manufacturers are likely to benefit players in the solar power sector.

The availability of large liquid investments has allowed the company to raise debt at competitive rates. Sustaining a healthy financial performance in the current financial year will avert any scenario of a stock collapse in the foreseeable future.

For more details, check out the company's factsheet and quarterly results.

#2 Oriental Carbon & Chemicals

Established in 1978 as Dharuhera Chemicals, the merger with Oriental Carbon and Oriental Carbon & Chemicals in 1984 gave birth to a single entity known as Oriental Carbon & Chemicals. The company is part of the JP Goenka group of companies.

Oriental Carbon operates through two segments which are chemicals and general engineering products. The company is also an internationally well-known manufacturer of insoluble sulphur accounting for approximately 10% of the global production.

Currently, the market capitalisation of Oriental stands at Rs 7.7 bn.

Over the last 5 years, the net income of the company has grown at a yearly rate of 9.8% compared to the industry average of 30.2%. The company's net profit has grown at a compound annual growth rate (CAGR) of 14.5% during the same time period.

The debt to equity ratio between 2017 and 2021 has been 0.3x, at par with the industry average 0f 0.3x.

5 Year Debt to Equity Ratio - Oriental Carbon & Chemicals

2017 2018 2019 2020 2021
0.33 0.32 0.32 0.32 0.34
Data source: Ace Equity

In the financial year 2020 - 2021, the current liabilities of the company are Rs 1.8 bn registering an increase of 29.2% over the last year that had recorded a debt of Rs 954 m. Long-term debt for Oriental stood at Rs 1 bn as compared to Rs 963 m, a growth of 17.3%.

Despite the liabilities, Oriental has made an effort to reduce its debt to equity ratio over the last five years from 32.3% to 31.6%. However, the company's current solvency ratio deteriorated and stood at 2.5x during 2021, a decline from 2.9x in 2020.

ROE for the company is 15% at par with the industry average of 15% during the financial year 2021. However, there was a dip from 16.1% in the last fiscal year.

Oriental Carbon is currently priced at Rs 760 per share which is a premium valuation at this point. Over the last year, the share price has increased from Rs 559.3 to Rs 917.1 registering a gain of 64%.

Despite the financial challenges, the company is planning its expansion into new geographies such as North America over the next 3 to 5 years. Oriental is also ramping up capacity to meet the demand from reaching out to new markets in the foreseeable future.

Given their solid growth plans, it is unlikely that the shares of the company will collapse any time soon.

For more details, check out the company's factsheet and quarterly results.

#3 Mishra Dhatun

Mishra Dhatun Nigam was incorporated in 1973 as a government of India enterprise under the Ministry of Defence. This public sector enterprise (PSU) is a niche player and a leading manufacturer of special steels, and superalloys. It is also the only company in India to produce titanium alloys.

Mishra Dhatun is also a key supplier of various super alloys, special steels, materials for defence, and other strategic sectors such as aeronautics, space, nuclear, chemical, petrochemical, power generation, and furnace industries.

The market capitalisation of Mishra Dhatun currently stands at Rs 30.8 bn.

In the last 5 years, the company has lost market share to its rivals bringing it down to 0.8% from 0.9%. Revenue for the PSU has grown at an average rate of 2.3% compared to the industry benchmark of 5.4%.

However, the company's revenue recorded a 14.1% YoY jump in the year 2021 with its highest ever sales figures of Rs 8.1 bn. The ROE for the same financial year stands at 16.4% which is more than the industry average of 15.6%.

Currently, the PSU has a debt of Rs 1.6 bn. The company's debt to equity ratio has increased from 0.03x to 0.2x over the past 5 years. The debt to equity ratio for the financial year 2020 - 2021 is 0.2x which is satisfactory.

5 Year Debt to Equity Ratio - Mishra Dhatun Nigam

2017 2018 2019 2020 2021
0.03 0.12 0.13 0.14 0.15
Data source: Ace Equity

The PSU has consistently maintained effective average operating margins of 27.2% which can cover its current debt.

Shares of Mishra Dhatun are trading at Rs 165. The price has dipped from Rs 198 at the end of 2020 making it an attractive buy for investors looking to bet long term on the company.

This is based on the predictions of a booming global market for high performance alloys that is expected to grow at a rate of approximately 5%. This will take the market from US$ 9 bn in 2019 to US$ 13 bn in 2027.

Moreover, the government of India's 'Atmanirbhar Bharat' and 'Make in India' programs may possibly result in a steady flow of orders for the company going forward.

With a strong promoter holding at 74% and the backing of the central government, a stock collapse scenario seems a highly questionable prospect at this point in time.

For more details, check out the company's factsheet and quarterly results.

#4 Anant Raj

Formerly known as Anant Raj Industries, the company was rechristened as Anant Raj in 2012.

Operating since 1969, the company's name has become synonymous with the construction and development of innovative real estate projects, both commercial and residential in north, northwest and southeast India.

Anant Raj has forayed into the leasing of commercial properties in prime areas of Delhi and the National Capital Region (NCR). It is also one of the land bank and property owners in this area.

The company has a current market capitalisation of Rs 14.9 bn. The market share has also seen a slight dip from 0.8% to 0.6% during the same time period.

Anant Raj posted a revenue of Rs 2.5 bn in the year 2021 registering a de-growth of 9.6% from the previous financial year.

Net profit for the year also declined by 98.6% YoY. Overall, the company recorded a lower than industry revenue growth of -10.8% versus -4.4% over the last 5 years.

The current long term debt of the company is pegged at Rs 16.1 bn while liabilities stand at approximately Rs 6 bn for year 2021.

Overall, the total assets and liabilities for the financial year 2021 stood at Rs 46 bn, recording a minor 0.5% increase from the year 2019 - 2020.

The company's debt to equity ratio has increased from 0.4x to 0.7x over the past 5 years. The industry average in the five year term is around 0.9x.

5 Year Debt to Equity Ratio - Anant Raj

2017 2018 2019 2020 2021
0.41 0.62 0.64 0.68 0.67
Data source: Ace Equity

Anant Raj has improved its net cash flows from Rs -458 m to Rs 185 m in 2021.

Despite the boost in cash flows, the debt burden is substantial. However, the company grew its earnings before interest and taxes (EBIT) by a smooth 58% over the last twelve months putting Anant Raj in a much stronger position to manage its debt.

Over the last year, Anant Raj's share price has moved up from Rs 19.8 to Rs 54.5, registering a gain of Rs 34.8 or around 175.9%. It is currently trading at around Rs 51.

Anant Raj is one of the multibagger stocks of 2021 that delivered a 150% return to its shareholders. Given the strong fundamentals, the stock has the potential to hit a triple digit number in the medium to long term.

Therefore, a collapse of the stock may not be on the cards in the near future.

For more details, check out the company's factsheet and quarterly results.

Should Investors Look at Investing in Companies that can manage High Debt?

There's nothing wrong with taking a safe route to investment. This is perhaps why majority of investors will want to steer clear of companies having high debt.

Whether you like it or not, debt can be scary. Investors may be apprehensive because the company may just go out of business one fine morning. In such cases, debt holders will get priority in getting their money back before the shareholders.

The second reason, and perhaps, the more important of the two is that debt repayments eat up cash.

That said, when investors are deciding on which companies to put their money in, the debt to equity ratio cannot be the sole criteria in the decision making process. In fact, the figure should not be considered in isolation at all as the ratio is relative.

High debt is not necessarily an indicator that a company is struggling. Many companies today use it to stimulate growth. In such instances, investors can potentially reap in high returns.

Moreover, debt can help companies grow and expand. It's only when the debt is unserviceable that the company will find itself in trouble.

Investing requires careful analysis of the company's entire financial data along with pouring over its current and historical performance. This brings out the true worth of the company.

Keep a close eye on corporate debt but remember that the debt to equity ratio by itself won't give you enough information to make an educated investment decision.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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