Debt flood washes over corporate sales stream

Written by MG Arun | Baiju Kalesh | Mumbai | Updated: Nov 21 2011, 07:15am hrs
Heavy loans taken by Indian companies in the past to build mobile networks, power plants, airlines and airports have come back to haunt them. Deepening economic slowdown, rising interest rates and a falling stock market, which has closed the tap to raise equity, have put question marks over profits, loan repayment capacity and growth.

In many companies, the quantum of debt has even overtaken their sales.

Bharti Airtel, Indias largest mobile telephony company by subscribers and revenues, owes its lenders R60,091 crore against sales of R59,467 crore as on March 31, while rival Reliance Communications (RCom) must repay R33,744 crore with R22,430 crore revenues, Bloomberg data show.

The companies borrowed heavily to purchase third-generation wireless spectrum and later invested in rolling out networks. Mobile telephony companies paid roughly R1.06 lakh crore to purchase 3G and BWA spectrum in 2010. Bharti Airtel did not respond to emails and telephone calls.

RCom had pre-invested in capex for building the required infrastructure for the companys future expansion plans, said Syed Safawi, its president (wireless), in an earlier interaction with FE.

The company did not sell equity to raise funds, and took debt. We still hold 67% equity, the largest Indian operator holding so much equity, he added.

Analysts say heavy investment and fierce competition for subscribers led to lower returns. However, they say the investments have started returning rewards now. Companies that have reported their financial results for the second quarter are seeing healthier revenues and a buoyancy in margins, says Kunal Bajaj, director, at consulting firm Analysys Mason India. This doesnt mean the debt will go away, but is an indication that the health of these companies is not a concern.

Some consultants say asset-heavy companies barring oil refiners which are primarily government-controlled will be vulnerable. In the downturn, where growth slows to 6% from from 9%, much of the companies calculations go awry, says Raju Bhinge, chief executive of Tata Strategic Management Group or TSMG, the consulting arm of the Tata Group.

There are sectors where companies are over-leveraged like airlines, telecom and real estate, where there could be a lot of pain, says Bhinge.

India's second-largest passenger carrier by market share Kingfisher Airlines and mobile tower operator GTL Infrastructure have come under debt recast as they found it tough to repay debt.

Power plant builders which have borrowed heavily have been hit by rise in interest rates, coal prices and cost of building. RBI has raised interest rates 12 times in 18 months, coal prices have risen 15-20% in the last three months and building cost has risen to Rs 4.5 crore a mega watt from 4 earlier.

Lenders are not worried yet. We are not concerned about their debt, says an official at Indias largest lender, the State Bank of India or SBI. The loans are being serviced regularly and no stress has been found as yet.

Debt per se is not bad for any organisation with steady cash flow, says Prabal Banerjee, chief financial officer of Adani Power, whose Rs 23,846 crore debt has crossed its sales of Rs 2,135 crore. In the power sector, leverage is to the tune of 80:20 or 4:1. Its rival Tata Power owes Rs 22,550 crore to lenders, more than twice its sales and Reliance Power has Rs 5,419 crore debt with Rs 1,024 crore sales.

Indian companies, both private and state-owned, are planning to build plants that will generate over 110,000 MW power by 2015. Power demand, easy access to funds and better margins by selling power to private companies have attracted investors.

What is important is how these companies plan to service debt, and what are the funds available to service these debt, another executive said. He cannot be quoted as he is not authorised to speak to the media.

Asset-heavy sectors are money guzzlers, but offer better and longer yearly returns.

In the infrastructure sector, revenues will be lower than capital expenditure, explained A Subba Rao, chief financial officer, GMR Group. The debt raised in respective projects will come up in the consolidated balance sheet; so it will look huge.

GMR, which builds airports, power plants and highways, owes Rs 19,219 crore, nearly four times its Rs 5,462 crore sales. The group raised Rs 2,200 crore to be repaid in 16 years to build an international airport in Hyderabad.

An investment of $1 trillion or Rs 4.8 lakh crore is expected in infrastructure in the 12th plan (2012-17), said GMR's Rao. Half of this will come from the private sector, and of this, $125 billion will be funded through equity, and $375 billion by way of debt.

Execution is key to infrastructure projects and any delay will drive up costs, upsetting business plans.

Slippages in execution and aggressive bidding have dented investor confidence, analysts Saion Mukherjee and Lalit Kumar of Nomura Equity Research wrote in a research report released on September 28. Bidding aggressively for projects and poor capital management haven't gone down well with investors.

GMR's Rao agrees that the important parameter to watch out for is whether the cash flow of the company helps service the debt or not. In the road sector, for instance, intense competition, aggressive bidding and the ability of the project to support the necessary cash flow become important, he said.

Some companies choose a mix of domestic and dollar-denominated foreign debt to pay lower interest.

Companies with heavy debt can re-adjust their capex plans, says TSMGs Bhinge. They can restructure their debt, convert it into quasi-equity or recycle it into longer-duration paper. In the meantime, they can cut down their capex and reduce their outgo and manage for the next couple of years, he added.

Infrastructure projects have dried up for several reasons, including absence of coal supply to power projects and difficulty in acquiring land for large projects. The telecom sector is still under the cloud of 2G scam, said the SBI official.

Adani Power has borrowed abroad and structured its letters of credit (LC) to lower interest cost. There are three ways in which we are approaching this, said Banerjee. First, we raised $1 billion in ECBs at a lower rate. Second, we have gone in for long-term capital LC, and third, we have gone in for refinancing debt.

TSMGs Bhinge says interest rate is attractive in ECBs. Companies normally hedge the project risk. Even with that hedge, it is still cheaper than domestic borrowing.

Companies may find tough to raise capital from the stock market as valuations have crashed, say investment bankers. They will have to sell their stake at a lower value, a move Indian promoters are reluctant about, says an investment banker.

RCom says will sell its 50,000 towers and has refinanced its debt with Chinese Development Bank (CDB).

On debt management, I refinanced my 3G spectrum with a CDB loan, says Safawi. It is a 10-year moratorium, with RCom getting Rs 6,000 crore from CDB, and have another line of credit of Rs 2,700 crore from the same bank. It saves me Rs 500 crore of interest a year. Sale of towers will reduce its debt and increase operating profit.

Debt-ridden Kingfisher Airlines, which is seeking working capital to run its airline, will recast debt by replacing loan borrowed from Indian lenders with foreign banks. It has also asked banks to give a guarantee to its lessors to release money deposited with them.

Companies need to preserve cash in a slow down as it can buy cheaper assets. Cash is king, says TSMG's Bhinge. Post 2008-09, there are still some sectors which have borrowed heavily and they will have their worries.

(Sitanshu Swain contributed to the story)