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Should these companies trade below debt value?
Tue, 31 Mar Pre-Open

In the run up to the global liquidity crisis of 2008, many large Indian companies expanded at a scorching pace through big ticket acquisitions. Most of these growth initiatives were funded through a combination of internal reserves and debt. But in many cases it turned out that the companies had bitten more than they could chew as the timing did not seem to work in their favour. On one hand, the global slowdown adversely impacted the growth of the overseas business ventures. As if this was not enough, growth in even the domestic markets took a hit as Indian economy slowed down considerably since FY12. Thus sluggish sales and debt burden further stretched the balance sheet of these companies.

As per a Standard & Poor's report on the credit profile of India's top 100 corporate, based on market capitalization, the debt levels of companies in infrastructure, mining and metal companies shot up by more than 1.5 times in the last five years. In FY15, a number of debt-ridden companies were forced to undergo distress sale of assets under growing pressure from banks caught in loan defaults.

Companies such as Jaiprakash Associates, Lanco Infra, Suzlon, Tata Steel and Videocon Industries pared debt during the year from funds raised through divestments and asset sale. Still the debt levels of most companies continue to remain much higher than their market valuations thereby making it difficult for them to access the capital markets for fresh equity.

Moreover, divestment of cash rich business operations has also strained the working capital management of some companies, adding further to their debt burden. With the economic engine yet to gain momentum, indebted companies are clearly not out of the woods.

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Feb 21, 2018 (Close)