These 5 High Debt Stocks Unlikely to Crash in 2024

Following subsequent interest rate hikes in 2023, the US Fed is gearing up to reverse course and start cutting borrowing costs.

Other central banks are expected to follow suit. England's central bank (ECB) has already hinted the same thing as the US fed and rate cut is surely on the cards.

Recently, the US Fed decided to hold rates steady, expressing its inclination towards three potential cuts in 2024. The RBI, too in its recent policy meeting, left the rates unchanged.

This dramatic shift towards a lower interest rate regime has brought cheer into the market, especially for companies with debt ridden balance sheets.

With that in mind, here are 5 high-debt stocks that might just thrive in 2024.

#1 Adani Green Energy

At the top of our list, we have Adani Green Energy.

One of the largest renewable companies in India, Adani Green, holds the largest solar power generation capacity globally.

Generating power through renewable sources such as solar and wind energy, the company builds, develops and maintains utility-scale grid-connected solar and wind farm projects.

Most of this has been made possible as the Adani group company borrowed a lot of money to finance its projects.

Adani Green Energy Debt Profile (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Total Debt (Rs m)	1,22,358	1,60,850	2,52,130	5,36,120	5,42,710
Interest coverage ratio (x)	0.5	1.0	1.1	1.2	1.4
Debt to equity Ratio (x)	14.6	21.1	29.3	45.1	9.2
Free Cashflow (Rs m)	(21865.00)	(28590.00)	(61040.00)	(1,39,460)	5,800

Data Source: Ace Equity

While the business has grown at a fast rate, it comes on the back of tremendous borrowings. Between 2019-2023, the debt has ballooned up 5 times. The debt to equity in financial year 2023 was at 9.2x with a dismal interest coverage ratio of 1.4x.

After years of negative cashflow, the company generated positive cashflows in financial year 2023. The cashflows tells us about the company's ability to repay debt from internal sources.

However, the company is planning to raise money from institutional investors. In July 2023, Adani Green had said it approved raising Rs 123 bn through a qualified institutional placement (QIP). The company is in talks with its existing investor, Total Energies, to ramp up its investments as well.

Any fall in interest rates can certainly help the company free up its cashflows. However, it does need to raise funds externally to relieve the business of any kind of pressure.

#2 Tata Power

Next on our list is Tata Power.

Tata Power has transformed into India's undisputed energy powerhouse. Its grip extends across the electricity value chain, including generation, transmission and distribution.

But the company isn't resting here. Looking ahead, Tata Power aims to become the frontrunner in India's clean energy revolution.

It is investing heavily towards this transition, building an expansive EV infrastructure and setting up EV charging stations across the country.

The company is funding its ambitious plans via external borrowings, making it one of the top 5 heavily indebted companies.

Moreover, the ability to re-pay debt via internal sources has been compromised, as reflected in the low interest coverage ratio.

Tata Power Debt Profile (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Total Debt (Rs m)	5,00,060	4,98,759	4,46,706	4,75,900	4,89,744
Interest coverage ratio (x)	1.9	1.5	1.5	1.8	2.3
Debt to equity Ratio (x)	3.0	2.8	2.2	2.1	1.7
Free Cashflow (Rs m)	(2,666)	28,087	20,355	(17,108)	(13,929)

Data Source: Ace Equity

Despite the heavy debt burden, there's a glimmer of hope. Given the current weak outlook for interest rates, Tata Power's profitability is likely to improve.

Lower interest payments should free up cash flow, allowing the company to invest freely in its clean energy initiatives and even reduce its debt burden.

The company has undertaken effective steps to deleverage its balance sheet, visible from a drop in debt to equity ratio.

Moreover, a large part of the company's total debt is long-term, due for re-payment only after 2-3 years. This gives their clean energy projects time to come on stream and generate robust cash flows.

Despite borrowing from Indian institutions, the company's weighted average cost of debt (interest rate) is 8.5%, which is not alarming. So, a weakening interest rate environment will only help the business.

#3 Tata Motors

Third on our list is Tata Motors.

Tata Motors is a leader in the domestic commercial vehicle segment with a well-established presence in the global luxury car market via Jaguar and Land Rover.

Despite its leadership status and a wide global presence, the company's balance sheet is debt-ridden.

While the company has been repaying debt in the past year, its total debt stands at Rs 452 bn, in the initial half of 2024.

Between 2019-2023, the debt to equity ratio has moved up from 1.7x to 2.8x, with the interest coverage ratio of 1.3x in financial year 2023.

Most of the company's debt is from foreign institutions with a relatively low-interest rate of around 5-7%.

However, the company long-term debt on its books, giving it ample time to generate strong cash flows.

Tata Motors Debt Profile (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Total Debt (Rs m)	92,981	1,13,496	1,19,307	1,52,973	2,16,262
Interest coverage ratio (x)	-4.5	-0.5	-0.3	0.3	1.3
Debt to equity Ratio (x)	1.8	1.9	2.5	3.1	2.8
Free Cashflow (Rs m)	(4,78,673)	(1,41,864)	(97,674)	(1,23,177)	48,566

Data Source: Ace Equity

Tata Motors has had a fantastic year, from an uptick in domestic demand and global production after addressing the chip shortages.

The company reported strong margins, thanks to the abating input prices and price hikes during the year.

Looking ahead, financial year 2024 is likely to be a strong one, especially for JLR. However, the next financial year could see potential demand problems surface for the international and domestic businesses.

A lowering interest rate can come in handy at such a time, helping it generate additional cash flow.

#4 TVS

Fourth on our list is TVS.

TVS Motor is India's third-largest two-wheeler company. It enjoys a 14% domestic market share and operates across motorcycles, scooters, and mopeds.

While dominating the export market, particularly in South Asia, Africa and Latin America, TVS have been keeping up with the changing times.

It has embraced the electric scooter sector, ranking second only to Ola Electric. The company's market share has jumped from 14% in January 2023 to 24% in October 2023.

TVS outpaced industry peers in growth within the motorcycle and scooter segments. The success of TVS Motor hinges on its significant investments in the electric vehicle (EV) segment, with plans to dispatch over 200,000 scooters in financial year 2024 and introduce new EVs.

Additionally, the company's global expansion includes a partnership with Emil Frey Group for entry into European markets. It continues to invest in its loss-making subsidiaries, confident of their prospect.

TVS Motors Debt Profile (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Total Debt (Rs m)	10,60,019	11,88,105	13,59,045	13,96,770	12,56,605
Interest coverage ratio (x)	2.6	2.0	1.9	2.1	2.4
Debt to equity Ratio (x)	2.9	3.5	3.1	3.5	3.9
Free Cashflow (Rs m)	(22,394)	(6,997)	870	(26,246)	(58,999)

Data Source: Ace Equity

TVS Motor has accumulated a considerable amount of debt, reflected in its FY23 debt-to-equity ratio of 3.9 and an interest coverage ratio of 2.4x.

The company's interest cost has fallen considerably from 9.5% in FY 2019 to 6.3% in FY 2023. The high debt to equity combined with a low interest coverage can be detrimental to the company.

However, the company is confident of repaying its debt in the coming year and reducing interest costs can only help by freeing up excess cash flow for the company to support its forthcoming expansion plans.

#5 NTPC

Last on our list is NTPC.

NTPC operates as a key player in the power sector, producing and distributing large quantities of electricity to various utility providers.

The power giant is committed to the development of renewable energy in the country and its potential to decarbonise the energy sector.

It is partaking in a variety of initiatives, from setting up India's first green hydrogen energy storage facility to working on working on green hydrogen derivatives.

The company has made some headway in this by commissioning its first green hydrogen blending with piped natural gas project.

NTPC's FY 2024 capex is pegged at Rs 100 bn. Going forward, the company will be spending more with a judicious mix of debt and internal accruals. the debt-to-equity has remained rangebound.

NTPC Debt Profile (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Total Debt (Rs m)	17,30,582	20,06,297	20,94,722	20,97,439	22,00,219
Interest coverage ratio (x)	3.0	3.6	2.8	3.3	3.2
Debt to equity Ratio (x)	1.6	1.7	1.7	1.6	1.5
Free Cashflow (Rs m)	(63,915)	(13,425)	49,360	82,178	4,501

Data Source: Ace Equity

As of March 2023, debt to equity stands at 1.5x with an interest coverage ratio of 3.2x.

The company has limited room to leverage its balance sheet, so any correction in interest rates can only help the company free up cash flow to fund its commitments.

However, there is a good chance the government will also incentivize renewable energy efforts, allowing the company to expand with ease.

Snapshot of High Debt Stocks on Equitymaster's Stock Screener

Here's a list of high debt stocks on Equitymaster's stock screener.

Please note these parameters can be changed according to your selection criteria.

In Conclusion

While falling rates can make debt-heavy companies grow faster, uncontrolled debt is a recipe for trouble.

Before investing in such stocks, dig deep into their fundamentals and understand their growth potential. Do your homework, then invest smartly!

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...