Higher interest rates fail to deter Corporate India

Written by Pradip Kumar Dey | Mumbai, Jul 27 | Updated: Jul 29 2008, 05:06am hrs
Despite higher interest rates, Indian corporates borrowed significant amount of money during FY08. According to a study of 500 corporates, the total debt amount increased by 34.2% from Rs 1.64 lakh crore during FY07 to Rs 2.20 lakh crore during FY08.

At the same time, the net worth of this sample also steadily increased by 28.4% from Rs 2.96 lakh crore during FY07 to Rs 3.80 lakh crore during FY08. Hence, the debt-equity ratio of the above number companies marginally increased to 0.58 during FY08 from the level of 0.55 during FY07. And this remains healthy allowing the companies more leeway to increase their borrowings, reckon analysts. The debt-to-equity ratio (D/E ratio), normally helps us to asses the extent to which the company is using borrowed money. It is simply obtained by dividing the total debt of the company by its share holders equity (net worth).

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

Among the 500 companies, 247 saw a fall in the D/E ratio, while 229 witnessed a rise in the two years under consideration. The remaining 24 companies' ratios were same for both the years.

In 2007-08, two major companies namely Bajaj Hind Sugar (18.45) and Vishal Exports (40.09) had ratios of eighteen or more. A significant increase in the D/E ratio was noticed in the case of Tata Motors ( 0.58 in 2006-07 o 0.80 in 2007-08), Sobha Developers (0.72 to 1.78) and Balrampur Chini (0.60 to 1.49). Corporates, which saw a sharp decrease in the D/E ratio, were Mangalore Refineries (0.86 to 0.55), Punj Lloyd (1.38 to 0.57) and Ultra Tech Cement (0.90 to 0.65).

In terms of debt, the top five companies during 2007-08 are Reliance Industries, Reliance Petro, JSW Steel, Bharti Airtel and Tata Motors.

Among these, highest increase in debt was witnessed in the case of Reliance Petro (134.6%) followed by JSW Steel (80.8%).