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  • Aug 7, 2023 - Why India is Better Prepared for the Corporate Debt Crisis

Why India is Better Prepared for the Corporate Debt Crisis

Aug 7, 2023

Why India is Better Prepared for the Corporate Debt Crisis

The situation around US debt is complex right now. It's like the crisis is spreading like a virus throughout the global financial system.

But India remains unaffected.

First, a little bit of background.

This year, we've seen three of the five largest bank failures in US history. So, when experts say the US is drowning in debt and corporate bankruptcies are piling up at the second-fastest pace since 2008, you better believe it. The debt-to-GDP ratio of the US is already well above 100%.

The Fed's willingness to increase interest rates as high as they need to, for inflation to come down was one of the focal points of discussion. What happens when the US increases rates above a certain threshold? Will it cause a recession?

Last week, one of the top rating agencies Fitch dropped a bomb and downgraded the credit rating of US debt to AA+ from the highest rating AAA.

This downgrade comes after lawmakers negotiated up until the last minute on a debt ceiling deal in May this year, risking the nation's first default.

Indian markets fell sharply for the next two days post announcement of the downgrade.

A debt default crisis would shock the global financial markets to its core. The last time the US was at risk of a default in 2011, stock markets had crashed. But a compromise was found at the last minute.

Back then, the rating agency in question was S&P. The limit on borrowing was only raised after protracted negotiations.

If you ask us, we believe the Fed will try to return to loose monetary policy or else they risk bankrupting the US. The common saying, 'If you play with fire, then you risk getting burnt', is applicable here. People don't forget when governments mismanage their money.

Now, let's come to the Indian situation...

Core profit growth at India's top companies has registered good growth. In the last quarter of FY23, Nifty 50 companies reached a record revenue milestone of Rs 11.1 trillion. Many stocks from the lot witnessed a record quarter, some in terms of revenue while some in terms of profit and operating profit.

Market experts predict there's a high probability that India could fare well and much better for foreseeable future compared to US as the latest results hint that India is passing the litmus test.

  • India's twin balance sheet problem is over. We now have a twin balance sheet advantage!

That's what Finance Minister Nirmala Sitharaman said last month.

Corporate India has already taken a massive step toward repairing its balance sheet. The first act of business they did was bring down the debt to equity ratio.

A month ago, Moody's Investors Service had a report out saying India's fiscal strength and the credit profile will be debt affordability. The agency projected a downward trend for the debt burden for India.

This time, rather than taking on more debt, Indian companies have invested their profits and extra balances to repay debt.

Midcap companies in particular have reduced a lot of debt. Midcaps are considered the best way to play the growth opportunities. Improving profits with declining interest costs pushes their earnings up a notch much faster.

These midcap companies have been at the forefront when it came to reducing debt.

#1 PI Industries

A leading player in the agrochemical space, PI Industries is engaged in manufacturing insecticides, fungicides, herbicides, and speciality products. These are widely used in farms across the globe.

Despite investing heavily in capex, the company has maintained a debt-free status over the years and has a healthy interest coverage ratio.

In FY23, the company became net debt free by reducing debt worth Rs 2.7 bn.

Given the growing demand for agricultural inputs, growing population, the company's robust product pipeline, and capex investments, PI Industries is poised for growth in the medium term.

To know more, checkout PI Industries' financial factsheet and latest quarterly results.

#2 Zee Entertainment

After decades, Zee Entertainment has finally reduced its debt burden and currently has zero debt on its balance sheet.

In FY22, the company's total debt stood at Rs 2.9 bn and in FY21, long term debt stood at Rs 6.8 bn. Since 2016, the company has taken on a lot of debt. Debt levels peaked in FY17 at Rs 22 bn at one point.

IndusInd Bank has time and again voiced concerns about Zee defaulting on debt but not anymore.

With a new management at helm, things could turn around for Zee. In July this year, Zee Entertainment said it formed an internal committee to run its operations after chairman and CEO Subhash Chandra and Punit Goenka failed to overturn the market regulator's ban on them holding board positions.

Zee Entertainment is now heading for a merger with and Sony Pictures Network India (now Culver Max Entertainment).

#3 SAIL

In August 2017, SAIL initially planned to reduce net debt to a range of Rs 150-200 bn. Within five years by 2022, the company had a debt to equity ratio of 0.3x which peaked at 1.3x in 2018.

Now as SAIL undertakes another big capex for expansion, the net debt level is expected to go up. We already saw this happen in FY23 when the company's unsecured short-term debt levels were much higher in comparison with FY22.

SAIL has a plan to expand its capacity to more than 32 MTPA by FY31-32. The company is also planning to enhance existing capacity with process and operating efficiencies. All this expansion will mainly show up in the balance sheet towards 2027 and 2028.

In FY23, SAIL's performance was also impacted largely due to coking coal prices hitting an historical high of around US$ 600 per tonne and falling to below US$ 200 per tonne within a span of six months.

#4 Indian Hotels

From having a long term debt of over Rs 40 bn in 2013, Indian Hotels has come a long way to bringing down this debt to around Rs 8 bn at present.

In FY21, the hotel major's long term debt stood somewhere around Rs 36 bn. This was reduced to Rs 19 bn in FY22 and Rs 8 bn in FY23. A substantial chunk of the debt reduction came from a Rs 20 bn rights issue and through a qualified institutional placement of shares for Rs 20 bn.

In its latest investor presentation, Indian Hotels has a slide showing its standalone business becoming debt free as of June 2023. The company recently posted its Q1 results, and its management said Indian Hotels signed 11 and opened 5 new hotels across all its brands.

The outlook for the upcoming quarters remains strong with the pace of demand driven by domestic consumption momentum, global events, and revival of international arrivals.

#5 Gujarat Gas

Gujarat Gas is a prominent player in India's city gas distribution industry, being the country's largest city gas distribution company.

Despite operating in a capital-intensive industry, the company's debt-to-equity ratio has come off, falling from 1.25x in fiscal 2019 to 0.09 in 2022. This is a direct result of the company's concerted efforts to repay a large chunk of its debt in the past 2-3 years.

The company became debt free in FY23. The naturally monopolistic nature of the business, in tandem with infrastructure and quasi-marketing exclusivity, has helped the company expand its business and maintain margins.

The company has been spending around Rs 5-10 bn annually. It has charted out a similar plan, going forward. It aims to expand its CNG infrastructure along with CGD operations given that only a fraction of the country has been covered with CGD networks so far.

Snapshot of companies reducing debt

Apart from the above, if you want to filter stocks that have reduced debt in FY23, check out Equitymaster's powerful stock screener.

Here are some more popular screens around debt and leverage:

Conclusion

Understanding the company's debt management practices, cash flow dynamics, and overall financial health is essential to gaining a holistic perspective.

As we see more data on this in the coming months, hopefully we will get a better understanding of how bad the crisis is in the US and its impact on India.

Stay tuned and let us know in the comments section what you think might happen.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

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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...

Yash Vora

Yash Vora is a financial writer with the Microcap Millionaires team at Equitymaster. He has followed the stock markets right from his early college days. So, Yash has a keen eye for the big market movers. His clear and crisp writeups offer sharp insights on market moving stocks, fund flows, economic data and IPOs. When not looking at stocks, Yash loves a game of table tennis or chess.

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