Companies weigh options to cut debt as markets open up

Steel companies are leading the charge from within corporate India to take advantage of improving capital flows to push debt recast. While real estate companies were the first movers to redraw their finances to meet land acquisition working capital needs, the steel companies are moving big time. So while JSW Steel and Tata Steel among others are raising funds to retire their high-cost debt taken for expansion and acquisition, a few of them like Ispat Industries and JSL Ltd are planning to restructure their debts.

Textile, construction and steel, the three sectors in India that witnessed sharp rise in the companies? debt-to-equity ratio during FY09 are now assessing different ways to reduce their debts as markets open up.

An FE analysis of 25 companies in construction, 27 companies in steel and 60 companies in textile shows that the companies in these sectors are highly leveraged with their debts being more than the net worth.

Many companies in these three sectors have taken a hit on their top line and bottom line, and are finding it difficult to repay their loans. Companies have already started evaluating ways and are looking at either raising fresh equity or restructuring their current loans to reduce the high debt appearing in their books.

Says Gaurav Dua, research head, Sharekhan, ?Companies that have taken loans at higher cost are now considering it prudent to bring down the debt.?

An FE analysis shows that the debt-to-equity ratio of the companies in these sectors has actually increased during FY09 compared to last year. The average debt-to-equity ratio of the construction industry in FY09 stands at 1.35 against 1.28 in FY08. In the textile and steel sector, the debt-to-equity ratio grew to 1.51 and 1.25 during FY09 against 1.17 and 0.98, respectively during FY08. A debt equity ratio of 1:1 is generally considered ideal, although companies tend to finance their aggressive growth with high debt, resulting in a high debt-to-equity ratio.

Experts believe the high leverage will continue to plague the textile sector at least in the medium term given the long dated debt maturities of the TUFS loan taken out for expanding production facilities.

The government had recently released an amount of Rs 2,546 crore in one tranche under TUFS to clear a two-year backlog of payments that were due till June 2009. Under TUFS, the government provides 5 % interest subvention and 10 % capital subsidy for specified processing machinery.

?With markets improving now, players are reducing their debts burden. As far as Alok Industries in concerned, our rights issue had helped up in reducing the gearing,? said Sunil Khandelwal, CFO of Alok Industries. Alok Industries had in March this year raised about Rs 450 crores via rights issue, that somewhat eased the pressure of huge debts (about Rs 6000 crore) lying in its books.

Steel, which is a highly capital-intensive sector, is also witnessing steel companies being highly leveraged as downturn takes a toll on the huge expansions made by the manufacturers. Players like Tata Steel, JSW Steel, Ispat Industries have raised money to repay their huge loans. JSW Steel Ltd, whose debt gearing on a consolidated basis is 1.79:1 as on March 31, 2009, is looking at bringing it down to 1.50:1.

The company aims to raise $1 billion through QIPs, FCCBs, GDRs, ADRs or warrants to mainly reduce its debts. JSW?s consolidated debts are estimated at close to Rs 15,000 crore. Similarly Ispat Industries is reported to be asking creditors to restructure its interest it owns on Rs 586 crore of debt into another loan as the steel industry struggles with declining demand and prices.

Anil Surekha, director-finance, Ispat Industries Ltd said, ?Steel is a highly capital intensive industry and as of now we are not looking at increasing our debt any further. Repayment of debts is an ongoing process.?

With 2.9:1 debt-equity ratio, JSL Ltd, the country?s largest stainless steel producer, is planning to restructure its Rs 4,300-crore debt to part fund the expansion of its Orissa project and avoid a possible default on the loans undertaken.

Meanwhile, most of the players in the real estate sector have restructured their loan with the banks following the slump in the realty market.

Real estate players like HDIL, Omaxe, Unitech and DLF have restructured their debts due for repayment by March 2009. After a recent debt restructuring exercise, t he Bangalore-based Sobha Developers has reduced its debt from Rs 1,900 crore to Rs 1,450 crore. .

Says Anand Gupta, chairman of Builders Association of India, ?In the last one year as the demand dipped and property value moved south, most of the real estate companies had taken a hit on their revenues resulting in high debt situation.?

Agreeing that this is the right time for the construction companies to reduce their debt burden and maintain their credibility in the market, Gupta said, ?Apart from restructuring their loans, most of the companies are now also looking at the IPO route or offloading their present shareholding for raising money.?