Debt-shy companies

Written by Pradip Kumar Dey | Updated: Dec 6 2010, 14:49pm hrs
Public sector undertakings recorded a steep fall in borrowing growth last year. Not just that, 12 of them reported nil debt during 2009-10. Key debt-free companies were MTNL, NMDC, Engineers India (EIL), Container Corporation, Dredging Corporation and National Aluminium.

Another encouraging news from the 37 PSUs under study is that, 14 of them reduced their borrowingssome pruned their debt to near zero. Those who had come within a whisker of a debt-free status included Hindustan Copper Ltd (HCL) and Maharashtra Electrosmelt.

A reduction in debt helps PSUs to save on interest cost, which otherwise eats into their net profit. Lower debt also leaves them with more cash to pay as shareholder dividends.

An attempt is made here to see the trend of debt-to-equity (D/E) ratio of 37 PSUs during 09-10, 08-09 and 07-08.

The debt-to-equity ratio is a pointer to the extent a company uses borrowed money. The ratio is obtained by dividing the total debt (loan funds) of a PSU by its net worth.

D/E ratio is a key analytical tool to apprise the financial structure of a company.

For 37 major PSUs (excluding banks and NBFCs), the growth of loan funds decreased from 29% during 08-09 to 10.9% during 09-10.

Their total debt increased from Rs 1.69 lakh crore in 07-08 to Rs 2.18 lakh crore during 08-09 and further to Rs 2.42 lakh crore during 09-10.The net worth of the companies steadily increased from Rs 3.34 lakh crore during 07-08 to Rs 4.19 lakh crore during 09-10, after reaching a level of Rs 3.69 lakh crore in 08-09. However, there was a marginal decline in the D/E ratio of the companies last year to 0.58 from 0.59 in 08-09. But the ratio was much lower at 0.51 during 07-08.

The downward trend in D/E ratio reflects the PSUs inclination to borrow less and rely more on internal accruals for growth. The strong profitability of PSUs last year, which ballooned their net worth, also helped.

According to analysts, more PSUs will try to get rid of their debt as market conditions turn conducive for raising funds through equity. Such funds can be used to repay loans and reduce interest outgo.

On the flip side, 23 out of the 37 PSUs borrowed more during 09-10. PSUs in steel, refineries, fertilisers and gas distribution raised more debt during 09-10.

In the group of companies with Rs 10,000-crore-plus net worth, a significant increase in debt was seen with SAIL. The company ended up with total borrowings of Rs 16,511 crore by March 2010, that was 118.3% higher than the borrowings in 08-09. Its debt-to-equity ratio rose from 0.27 to 0.50 in 09-10.

Eighteen PSUs saw a fall in the D/E ratio while 16 saw a rise. Only three remained unchanged. PSUs that had a very low D/E ratio during 09-10 were Bhel, Indraprashta Gas and GAIL.

A significant decline in the D/E ratio was observed in the case of IOC, HPCL, MRPL, STC, GMDC and Hind Copper. The D/E ratio of GMDC steadily decreased from 0.63 during 07-08 to 0.39 during 08-09 and further to 0.15 during 09-10.

PSUs which saw a sharp increase in the D/E ratio were Power Grid Corporation, SAIL, MMTC, CPCL, TN Newsprint and National Fertilisers. The D/E ratio of Power Grid steadily increased from 1.62, 1.92 and 2.13 during the three years.

The top five borrowers during 09-10 were IOC, NTPC, Power Grid Corpn.,BPCL and HPCL.The D/E ratios for these five were ranged between 0.61 and 2.13.