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IVRCL is an Excellent Example of All That is Wrong with Many Indian Corporates

Apr 5, 2016


Last week, a portion of a flyover being built in an old part of Kolkata collapsed, killing 27 people. The flyover was being built by IVRCL.

The company reacted immediately to the tragedy. AGK Murthy, director (operations) of the company told The Hindu: "It is for the first time in the history of the company that such an incident has occurred. We are unable to comprehend at this stage what could have happened. It is beyond our thinking. It is like an act of god."

An act of god is basically a legal term associated with events outside human control. Natural disasters like floods, earthquakes, cyclones etc., are a good example.

Hence, the question is can the collapse of the part of the flyover in Kolkata be called an act of god? The flyover clearly did not fall because of a natural disaster. Experts, who understand such things, are of the opinion that it was a design failure that caused the fall. Several experts told this to The Hindustan Times.

Also, much of the analysis on the issue in the media has missed out on the poor financials of IVRCL. The financial situation of the company has deteriorated considerably over the years. A few graphs that follow clearly show us that.

Let's start with the debt to equity ratio of IVRCL. As can be seen from the above chart, the debt to equity ratio of the company has been on its way up from March 2007 onwards. In fact, as of March 31, 2015, the debt to equity ratio of the company stood at 12.1. Hence, the total debt of the company was more than 12 times its shareholders' equity or networth.

What does this mean? This means that the borrowings of the company were more than 12 times its capital (or its own money or the skin in the game) in the business. The ratio is extremely high. In the normal scheme of things, lower the debt to equity ratio of a company, the better it is placed from a risk perspective. Its chances of being able to continue to pay the interest on the debt are higher.

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The question to ask is how did the company reach this stage?

A simple explanation for this lies in the fact that the company borrowed big-time to expand. But this expansion did not generate an adequate amount of sales. Take a look at the following chart. The sales of the company have fallen over the years.

In fact, the total sales of the company have been falling over the last few years. On March 31, 2015, the total sales stood at Rs 3,927 crore or around half of where it stood as on March 31, 2012.

Now take a look at the following chart. The blue dots represent the sales of the company and the orange dots the total debt. As the debt of the company went up, the sales also went up, until they started falling.

Falling sales, led to a fall in the net profit of the company. This happened because the debt that the company had taken on still needed to be serviced. The interest on the debt had to be paid. As the interest of debt kept mounting up (the orange dots in the following chart), the net profit of the company kept falling (the blue dots in the following charts). In fact, the company has been loss making over the last few years. For the year ending March 31, 2015, the company made a loss of Rs 1,568 crore.

Further, the company continues to make losses. During the period April 1, 2015 to December 31, 2015, the company made losses of Rs 797 crore.

As the total borrowings of the company went up, its sales went down. The idea behind borrowing, should have been to expand the business of the company, so as to increase sales as well as profit. The increased sales would have then allowed the company to pay the higher interest on the debt. The higher profit would have added to the higher networth or shareholders' equity.

The profit after paying dividend (if any) is retained by a company and is added to its networth or shareholders' equity. Hence, as the profit of IVRCL would have gone up, its networth would have gone up as well. This would have kept the debt to equity ratio of the company under control as well.

But this is how things should have played out theoretically. The fact of the matter is that they did not. In fact, the losses made by the company over the last few years have been adjusted against the networth and the networth has come down dramatically during the period.

It also needs to be pointed out here that IVRCL, like many other companies, got carried away in the era of easy money that prevailed between 2002 and 2008, and ended up borrowing much more than it could perhaps be able to repay.

Take a look at the following graph which charts the rate of interest that IVRCL has paid on its debt over the years. The rate of interest that the company paid on its debt in the financial year ending March 31, 2006, stood at 4.85%. This low rate of interest encouraged the company to increase its borrowing at a rapid pace.

As on March 31, 2005, the total debt of the company had stood at Rs 336 crore. By March 31, 2012, this had jumped up nearly 18 times to Rs 6,005 crore. Like many other infrastructure companies, IVRCL also had tried to cash in on an era of easy money and is now paying for the same.

In fact, on this and other counts, many other corporates are facing a similar set of problems because of having borrowed too much during the go-go years.

It is worth asking here that how could a state government allow a company with a debt to equity ratio of 12:1 to continue building a flyover? Any company in such a scenario would be really tempted to compromise on quality, in order to ensure that it could push up its profits and if not that, at least limit its losses.

IVRCL has said that "all necessary processes and quality steps have been taken as per standard operating procedure". This needs to properly investigated.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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6 Responses to "IVRCL is an Excellent Example of All That is Wrong with Many Indian Corporates"

Damodar Vinayak Bale

Apr 5, 2016

Basically the staff at the working sight needs to be trained well scientifically. In 'Indian situation',this is yet to be implemented in "INDIA". 'Human Life' is too cheap in India. That's because 'uneducated poor population' is looking for its 'daily bread'. The educated staff works as per instructions of their bosses fearing their services. "MONEY" is the 'culprit'. "HUMAN LIFE" is precious. "NATURE" knows it better and 'IT' reacts whenever & wherever 'MISUSE' of 'human intellect' takes place.

Like (2)


Apr 5, 2016

Dear Mr.Vivek Kaul, Thank You for Your article and nice analysis.In addition to the points raised by You about debt, I feel the Company has went on taking Debt as it has to pay a hefty Salary of about Rs.1.00 crore/ Month to its Chairman, irrespective of Company Making Losses since Years.The IVRCL Chairman's Salary is Higher than that of CMD of Reliance Industries, if I remember correctly.

The morale it appears is: You start some company, take loans( Public Money)and from that Money take Hefty Salary and You enjoy life irrespective of Company Makes profit or Loss and thus one's life goes on smoothly.Let the investers and Debtors go to HELL.

Like (1)


Apr 5, 2016


Excellent article on IVRCL with detailed analysis of Company's financials. As quoted in your article, it is really worth asking the concerned government authorities as to how they have entrusted such major infra structure works to a company with adverse financials. I fully endorse the writer's views that matter needs to be properly investigated and all those responsible should be punished as per law of the land.

Venu Gopal

Like (1)

BIS Cheema

Apr 5, 2016

How do such people who are heavily in debit ,,and have no colatral assets to offer as security , manage to get credit from the financial institutions, This is nothing but a criminal conspiracy , at the cost of the investing public at large. And the auditing machinery seem to have been part and parcrel of this game. This is the climate that explains the rise and run of people like Vijay Malliya . MALL LIYA AUR BHAG LIYA!!!!!. The political masters and the administrators , who are responsible for guarding the public interests turn a blind eye for reasons that are obvious . BHarat Mata Ki Jai!!!!!

Like (1)

manmohan khetan

Apr 5, 2016

Kudos! Vivek. You have done a root cause analysis. You are right basic fundamental thing is ignored.

Like (1)

Kamesh Chivukula

Apr 5, 2016

A well written article Vivek. Your recent posts have been enlivening because you were focussing on the facts and giving short shrift to your poisoned opinions namely criticizing every aspecct of national problems as Modi's making..

The easy money which you have cited as a cause for the troubles of IVRCL and others is bang on target. Another important characteristics of business houses nowadays is to expand their businesses without establishing credibility in the market though their operations.

Thee e-Commerce bug of Expanding on the basis of market potential and Unicorn valuations seems to have bitten most corporates, who simply want to jump on the heavy weight bandwagon without cleaving their way to the top through deeds instead of debts.

Like (1)
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