India Inc: Debt dogs refuse to tail away, even now

Indian companies have grown considerably since the 1990s.

Yet they appear to have come full circle to the debt problems they were facing then. India Inc heavily depended on external financing, including bank borrowings, to fund growth and working capital.

The debt-equity ratio was as high as 1.4 times the net worth as certificates of deposit and inter-corporate deposits gained popularity.

These days, debt is again rising as companies resort to external financing and internal sources of revenue generation continue to be a challenge.

A recent report by India Ratings says balance sheet debt has risen 193 per cent since 2008.

Interest expense has outstripped debt growth -- and might continue to rise, adds the report.

The dependence on external sources of finance, specially debt finance, renders India Inc vulnerable to domestic financial shocks.

On a broader level, the sizeable government debt has the potential to crowd out private investment.

While debt-equity ratios have fallen to 0.5 times, that’s largely due to faster equity growth, rather than debt reduction.

Of the 396 companies whose data was available then, several managed to grow equity, or shareholders net worth, 30

per cent yearly.

In fact, companies that relied less on debt managed to raise the net worth the fastest.

Of the top companies in the 1990s, Wipro grew its net shareholder equity at 35 per cent compound annual growth, while Sesa Goa and Cipla raised theirs 33 and 30 per cent, respectively.

The top five by sales were Tata Steel, Reliance Industries, Larsen & Toubro, ACC and Ashok Leyland.

They grew revenues 21 per cent annually, much faster than the GDP growth rate of 14 per cent, adjusted for inflation.

On aggregate, the top-25 per cent of Indian companies raised revenues 17 per cent and net profit 19 per cent, while market values soared at 20 per cent compound annual growth.

Backed by a well-established equity market, India Inc managed to grow valuations at a stellar pace, driven by a rising domestic equity culture and rising foreign flows.

The Indian capital market registered a market capitalisation of Rs 110,279 crore or Rs 1,102.79 billion (26 per cent of GDP) while the average daily turnover was Rs 150 crore (Rs 1.5 billion).

At present, the average turnover is Rs 15,000 crore (Rs 150 billion) in the cash segment, while the market capitalisation is Rs 65 lakh crore or Rs 65 trillion (70 per cent of the GDP).