Debt to equity ratio is a key filter that one considers while selecting stocks that can be part of the portfolio. While higher debt can lead to aggressive growth and return ratios for some time, it takes just one hit for the story to turn around. When things take an adverse turn, increased debt along with slow growth prospects becomes a huge burden. Higher finance costs in the times of slow down and failure to service debt can lead to a severe blow to a company's business and can spoil the credit rating and risk profile.
This is exactly what the infrastructure companies in India fear now. As per an article in Livemint, a lot of domestic infrastructure companies are planning to sell their assets to trim the debt on their balance sheets and get some breathing space. These companies are facing tough times as the economy has slowed down. This in turn has affected business in the infrastructure segment which is highly correlated to the broader economic prospects. The companies are facing headwinds on multiple fronts as slow growth and suppressed margins come along with rising finance costs.
The situation is even worse for companies that have foreign currency debt on their balance sheet. Domestic companies that were once lured by the prospect of raising cheap money from overseas are feeling trapped now as rupee depreciation has further raised the value of debt making it harder for them to meet debt servicing commitments .
While selling assets might make the balance sheet look better for the companies and help them in meeting working capital requirements, asset sales might not fetch the right valuations in current times and companies are likely to lose out in the long term. That said, there hardly seems to be a way out as raising money from the markets under the current economic conditions is not easy either. While things don't look bright for this segment, we hope that the companies will learn lessons from these tough times and make better financial decisions going ahead.