Fewer expansion plans and lower sales growth have resulted in lower debt-to-equity ratio (D/E) for companies. An FE analysis of 724 companies shows that growth of loan funds decreased from 35.2% in 2007-08 to 33.4% during 2008-09.

The downward trend in debt-to-equity ratio reflects corporate India’s reluctance to go for borrowings and increased reliance on internal accruals for growth. The strong profitability of companies during the bull-run has ensured rapid expansion in their net worth. It also indicates that most of the capex plans tend to get funded out of internal cash flows. This also results in lesser funds for investors as companies reinvest profits to fund further growth.

The debt-to-equity ratio measures the extent to which a company is using borrowed money. It is obtained by dividing the total debt (total loan funds) of the company by its shareholders? equity (net worth). A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings because of additional interest expenses. If a lot of debt is used to finance increased operations, the company could potentially generate more earnings than it would have without outside financing.

Says D R Dogra, DMD, Care Ratings, ?With the downturn in the economy resulting in slowdown in demand, many companies have put their aggressive plans on hold. Companies that are expanding are using their internal accruals and qualified institutional placement (QIPs). The companies are also trying to consolidate their position rather than going for further expansion and diversification.?

The D/E ratio is an important tool of financial analysis to assess the financial structure of a company. It indicates the relative claims of the creditors and shareholders against the capital employed by the company.

The total debt of the companies under the study increased from Rs 2.14 lakh crore in 2006-07 to Rs 2.90 lakh crore in 2007-08 and increased further to Rs 3.87 lakh crore in 2008-09. The net worth of these companies steadily increased from Rs 3.15 lakh crore in 2006-07 to Rs 4.84 lakh crore in 2008-09, after reaching a level of Rs 4.17 lakh crore in 2007-08. The debt-to-equity ratio of the companies decreased from 0.92 in 2006-07 to 0.69 in 2007-08 and increased to 0.80 in 2008-09.

Companies in automobiles, electric equipment, electronics, en- gineering, fertilisers, food products, personal care, pharmaceuticals, refineries and IT raised more debt during 2008-09. The debt-to-equity ratio also depends on the industry in which the company operates. Typically, while capital-intensive industries such as manufacturing have a debt-to-equity ratio above two, IT companies have a debt-to-equity ratio of under 0.5.

In the FE study, contrary to the perception, the group of companies with a net worth of more than Rs 1,000 crore saw their debt rise by 39.4% during 2008-09. Those with a net worth of less than Rs 1,000 crore registered only a 20.2% growth over the previous year.

In the group of companies with a net worth above Rs 1,000 crore, a significant increase in debt was seen in the case of Tata Communications. The company ended up with total borrowings of Rs 2,327 crore by March 2009, up by about 200% over the borrowings at the end of 2007-08. The company’s debt-to-equity ratio increased from 0.12 to 0.34 during 2008-09.

Among these 724 companies, 316 companies saw a fall in the D/E ratio, while 362 companies witnessed a rise in the two years under consideration. The ratio in the case of remaining 46 companies was same for both the years.

Says Kishor P Ostwal, CMD, CNI Research, ?After the extension of power of Debt Recovery Tribunal, companies have become reluctant to take loans. Due to expansion of global market and easy availability of funds in the FCCB market, companies even prefer to borrow from outside India. It is also partly because the market saw a bull run in 2007-08 and easy equity funds were easily available to corporates.?

As far as companies are concerned, in 2008-09 Saurashtra Cement and Venus Sugar had significantly high ratios. Companies, which had a very low D/E ratio in ?08-09, were Areva T&D and Lloyds Metals. A significant increase in the D/E ratio was noticed in the case of Mahindra & Mahindra, Gobind Sugar, Jet Airways and Asahi India Glass. At Mahindra & Mahindra, the debt at the end of March 2009 was Rs 4,052 crore, which is up by about Rs 1,465 crore over 2007-08. With sales of both tractors and utility vehicles somewhat slow, cash flow was at just under Rs 1,200 crore, which was half the amount spent in the last couple of years. The debt-to-equity ratio was 0.77 during 2008-09 against 0.60 during 2007-08.

Corporates, which saw a sharp decrease in the D/E ratio, included Bajaj Hind Sugar, KDL Biotech and Shree Digvijay Cement. Companies such as Ashok Leyland, Areva T&D, Coromandel Fertilisers, Dabur India, Dish TV, Gulf Oil, Hindustan Unilever, ITD Cementation, NIIT, Punj Lloyd, Petronet LNG, Suzlon Energy, Tata Motors, TCS, Wockhardt and Zee News saw their debt more than double in fiscal 2008-09 compared to the earlier period.

In terms of debt, the top five companies during 2008-09 were Tata Steel, HPCL, Jet Airways, Tata Motors and JSW Steel. Among these, the highest increase in debt during 2008-09 from the level of 2007-08 was witnessed in the case of Tata Motors followed by JSW Steel. Tata Motors, which has mopped up about Rs 4,000 crore from a right issue, ended up with total borrowings of Rs 13,165 crore by March 2009. That is higher by 109.6% over the borrowings at the end of 2007-08. The company’s debt was incurred largely to the purchase of Jagaur Land Rover last year. It took a bridge loan of $3.2 billion. Besides, it?s incurring additional debts to keep the loss making unit running. Saddled with these borrowings, the company?s debt-to-equity ratio increased from 0.80 to 1.08 during 2008-09.

The story is somewhat similar at Tata Steel. At the end of March 2009, the debt on the books of Tata Steel was close to Rs 26,900 crore, with debt-to-equity ratio at 1.09. Higher borrowings did result in a deterioration of the debt-to-equity position of these companies, with four out of 10 companies seeing the ratio climb beyond 1:1 during the study period. Companies such as Bombay Dyeing, Chemplast Sanmar, Jet Airways and Sakthi Sugars are some instances where the debt-to-equity ratio has almost doubled compared to the previous fiscal year.

Among the 30 sectors studied, only two sectors ? paper and trading-registered decline in loan funds during 2008-09. The total debt of paper and trading companies declined by 14.9% and 4.4%, respectively.

More than 30% increase in debt was seen in the case of automobiles, IT, electric equipment, electronics, engineering, entertainment, fertilisers, food and processing, hotels, personal care, petrochemicals, electricity, steel, telecommunications and tyres.

The debt figure of automobile companies increased by 66.6% to Rs 26,771 crore during 2008-09 from the level of Rs 16,067 crore during 2007-08. The debt-to-equity ratio of automobile industries increased from 0.66 during 2007-08 to 0.84% during 2008-09.

The highest and lowest D/E ratio was observed in 2008-09 in the case of sugar and IT respectively. A steady declining trend in D/E ratios during last three years was seen in the case of cement, shipping and tea. On the other hand, an upward trend was seen in the case of entertainment and personal care.

But during the last two years, a significant increase in the ratio can be seen in the case of construction, electric equipment, electronics, entertainment, fertilisers, petrochemicals, automobile, sugar, steel, textiles and tyres.

The D/E ratio of construction firms increased from 1.28 during 2007-08 to 1.35 during 2008-09. An opposite trend can be seen in cement & products, shipping, tea and trading companies. The D/E ratio of cement companies decreased from 0.62 to 0.59 during the study period. The highest increase in debt during ?08-09 from the level of ?07-08 was seen in electric equipment followed by entertainment.