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12/29/2015 A fifth of corporate debt in troubled waters | Business Standard News
http://www.businessstandard.com/article/companies/afifthofcorporatedebtintroubledwaters115122500034_1.html 1/14
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Krishna Kant | Mumbai December 25, 2015 Last Updated at 00:58 IST
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A fifth of corporate debt introubled waters67 companies with total debt of Rs 5.65 lakh cr were either lossmaking or didn't generate enoughprofit to cover interest cost in FY15
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Reserve Bank of India Governor Raghuram Rajan iscorrect in flagging concerns about the high level ofcorporate debt and India Inc's ability to service it, due todeclining growth and profitability. This could result in morepain for banks, as bad loans could rise further.
Nearly a fifth of corporate India's debt is in troubled waters.These companies either reported operating losses in the
12/29/2015 A fifth of corporate debt in troubled waters | Business Standard News
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8,300
S&P BSE Midcap index hitslifetime high
last financial year or their operating profit is insufficient tocover their annual interest burden.
In all, these 67 companies had a total debt of Rs 5.65 lakhcrore on their balance sheets at the end of 201415,accounting for a fifth of all borrowings by the country's top441 indebted nonfinancial companies. The net worth hasturned negative for many of these companies, makingthem financially insolvent technically.
The number of companies with insufficient operating profitsto service the interest burden (interest coverage ratio ofless than 1) increased to 67 by the end of 201415 from 49in the previous year, 29 three years ago and only 16
companies at the end of 200910.
The analysis is based on the indebted companies from the common sample of BSE 500, BSE Midcap and BSE Smallcap index. Excluding zerodebt companies, the sample includes 441 nonfinancial companies.
At the end of 201415, the companies in the sample were sitting on a total gross debt of Rs 28.5lakh crore, accounting for 98.1 per cent of the total gross debt of all 654 nonfinancial companies inthe universe. In comparison, the indebted companies accounted for 80.7 per cent of total net salesof the universe, 68.9 per cent of the operating profit, and 39.4 per cent of the net profit of the entireuniverse of 654 companies in 201415.
At the macro level, there has been a steady decline in companies' ability to service debt.
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Return on capital employed (RoCE) for the indebted in the Business Standard sample declined to adecadelow 7.4 per cent in 201415, which was only a few basis points (a basis point is ahundredth of a percentage point) more than their average interest cost of 7.1 per cent.
At this rate, many companies may be forced to default on their loans as profits from operations willbe insufficient to cover the cost of debt servicing. The firms' interest cost on incremental debt isalready trending higher than the underlying return on capital employed. In 201415, the cost ofincremental debt shot up to 11.8 per cent, nearly 440 bps higher than the underlying return oncapital employed.
At its peak during the financial year 200405, these companies reported a return on capitalemployed of 18.7 per cent more than twice their average interest cost of 6.9 per cent.
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READ MORE ON CORPORATE DEBT RESERVE BANK OF INDIA RAGHURAM RAJAN
INDIA INC BSE 500 BSE MIDCAP BSE SMALLCAP
RETURN ON CAPITAL EMPLOYED ROCE MADAN SABNAVIS CARE RATINGS
DHANANJAY SINHA EMKAY GLOBAL FINANCIAL SERVICES COMPANIES FEATURES
The last financial year was also the first instance in a decade when companies' interest expenseswere higher than depreciation. The indebted companies of the sample spent Rs 2.03 lakh crore oninterest payments in 201415, up from Rs 1.83 lakh crore a year ago. In comparison, theirdepreciation allowance rose marginally to Rs 2.02 lakh crore from Rs 1.9 lakh crore in 201314.
Thus, companies spent a greater part of their operating profits on debt servicing rather than capitalexpenditure and growth. In all, interest payments accounted for 34.2 per cent of the companies'operating profits in average last financial year, up from 16.7 per cent five years ago and 12 per centa decade ago. This leaves little resources for growth capital.
Not surprisingly, analysts are worried about India Inc's growth prospects in the medium term. "Ifcorporate earnings don't pick up quickly, I foresee more pain for banks, especially public sectorbanks. Ultimately, banks and their shareholders may have to take a haircut and write off largeamounts of bad loans to kickstart capex and project lending," said Dhananjay Sinha, head ofinstitutional equity at Emkay Global Financial Services.
Others see it as a purely cyclical issue, which will be resolved once growth resumes. "Highcorporate indebtedness is natural after a growth and capex boom. Once growth resumes andasset utilisation rates improve, the debt servicing burden will decline leading to improvement inbanks' NPA levels," said Madan Sabnavis, chief economist, CARE Ratings.
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COMMENTS 1 POST COMMENT
December 25, 2015, Friday Reply
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CA. SUBHASH CHANDRA PODDER
A fifth of corporate debt in troubled waters. It proves what " Reserve Bank of IndiaGovernor Raghuram Rajan is correct in flagging concerns about the high level ofcorporate debt and India Inc's ability to service it, due to declining growth andprofitability. This could result in more pain for banks, as bad loans could rise further.Not surprisingly, analysts are worried about India Inc's growth prospects in themedium term. "If corporate earnings don't pick up quickly, I foresee more pain forbanks, especially public sector banks. Ultimately, banks and their shareholders mayhave to take a haircut and write off large amounts of bad loans to kick-start capex andproject lending," said Dhananjay Sinha, head of institutional equity at Emkay GlobalFinancial Services. Is India rising ? What is the View of our Respected Ministersespecially MR. Arun Jaitley about INR 5.56 lakh Crore ?
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