Although the aggregate net debt of leading Indian companies declined in FY15, leverage ratio of smaller firms touched a 10-year high, noted Macquarie Securities in a research report. It said that while leverage has peaked, the turnaround may be a slower process given the weak equity markets.
“Our interaction with corporates suggests that debt reduction remains their key focus,” said the foreign broking house in a research note titled “Eye on India”.
According to the report, the net debt to equity of BSE-500 companies (excluding financials) fell from a 10-year high in FY14 to about 0.57 times in FY15, driven by a conscious effort to deleverage by corporates.. However, weak equity markets have limited equity raising to just $17.4 billion in the past two years compared to more than $40 billion raised in the previous cycles. In FY15, equity raising stood at just about $10 billion, almost half the amount raised in the previous up-cycle.
Noting that companies had to resort to reducing the size of their balance sheets by selling assets, Macquarie said asset sales may pick up going ahead. “Excluding pharma and telecom, asset sales during FY15 amounted to $4.5 billion, the highest in 10 years. Previously, asset sales spiked during FY09 amid the global financial crisis with an aggregate figure of $2.5 billion,” it added.
The trend in rating upgrades picked up after the mini-currency-crisis in 2013, raising hopes of an improving credit profile for Indian entities. In FY15, around 10% of total graded instruments were upgraded, the highest in five years, while 5% of instruments were downgraded, down from the peak of 10% in FY13. “ However, the proportion of non-investment grade ratings as a proportion of total ratings remains at all-time high,”said Macquarie in the research note dated June 26.
Highlighting that languishing economic cycle has created a second round of NPAs and leveraged companies have seen their stocks correct by 30-80%, the foreign broking house recommended stocks that are at bankruptcy valuations but should survive. These include Tata Steel, Hindalco, DLF, NCC, Jindal Steel & Power and Aban Offshore .