Balance sheet of India Inc weakens; net debt-equity ratio inches up in FY19

Illustration by Ajay Mohanty
The recent deterioration in corporate earnings has begun to affect India Inc’s balance sheet and leverage ratios. India’s top companies and business groups reported an increase in their debt-equity ratio during 2018-19 (FY19), putting a stop to the process of balance sheet deleveraging seen in the previous three years. The private sector debt-equity ratio (net of cash and bank balances on companies’ books) inched up marginally to 0.88x at the end of FY19, against 0.86x a year ago. 

Companies’ combined borrowings were up 13.2 per cent year-on-year (YoY) in FY19, growing at the fastest pace in at least the last five years. In comparison, their net worth or shareholders’ equity was up 11.3 per cent, down from 14 per cent growth a year ago (see chart).

It was even worse for the 40 listed non-financial public sector undertakings (PSUs) in our sample, such as Oil and Natural Gas Corporation, NTPC, Power Grid Corporation of India, Bharat Heavy Electricals, and Steel Authority of India. Their average debt-equity ratio was up 10 basis points (bps) YoY to a record high of 0.68 in FY19. This is the third consecutive year of a worsening in the balance sheet ratio of PSUs.

Combined borrowings of government-owned companies were up 13.5 per cent in 2017-18, against 1.9 per cent YoY growth in their net worth last financial year and 12.8 per cent YoY decline in their cash and bank balances last financial year. 

Analysts attribute this to a combination of growth slowdown and poor profitability. 

“There has been a sharp slowdown in demand growth across sectors, hitting corporate top line and profitability. The slowdown has been most pronounced in capital-intensive sectors, such as metals, energy, infrastructure, and telecom, dealing a double blow to corporate balance sheets,” says G Chokkalingam, managing director, Equinomics Research & Advisory.

The combined net profit of companies in the private sector was down 8.1 per cent YoY last financial year, a second consecutive year of earnings contraction, while earnings were up 2.1 per cent in the public sector. 

According to analysts, public sector companies largely took a hit from a rise in dividend payout and spending on share buybacks. PSUs’ cash reserves were down 12.8 per cent YoY in FY19.

Analysts say the higher indebtedness will make it tough for corporates to go for a fresh round of capital expenditure (capex) and end the investment drought in the economy. “Given the high debt on their books, companies have little ability to raise fresh debt to make incremental capex. Growth capital can only come from incremental increase in profits and cash flows,” says Dhananjay Sinha, head of strategy and chief economist, IDFC Securities. 

Besides, the demand situation in the economy is currently not very encouraging for companies to go for large capacity expansion, adds Sinha.

The analysis is based on a common sample of 782 non-financial companies that are either part of BSE500, BSE MidCap, and BSE SmallCap sectors. The sample excludes information technology exporters, fast-moving consumer goods companies, and Indian subsidiaries of multinationals. 

Firms from these sectors such as Tata Consultancy Services, Infosys, Hindustan Unilever, ITC, Asian Paints, Siemens India, Bosch, and Maruti Suzuki have been dropped from the sample as they have historically been debt-free and generate a lot of free cash flow. Their inclusion distorts the overall picture for India Inc. 

At the end of FY19, these debt-free segments of India Inc accounted for just 1.5 per cent of all corporate debt (at gross level) but 35.6 per cent of profits and nearly 38 per cent of the combined market capitalisation of all non-financial companies.

The analysis is largely based on unaudited financials, as most companies are yet to publish their annual reports for FY19. The final debt and leverage ratio could be higher, as borrowings are understated in the unaudited balance sheet. 

Numbers also suggest deterioration in companies’ debt servicing capacity. The interest coverage ratio (ICR) in the private sector declined to 2.1 in FY19, from 2.3 a year ago, while it was down 30 bps to 6.1 in the public sector. 

ICR is the ratio of profit before interest and taxes to interest liability. The ratio measures a companies’ ability to service their debt obligation. A greater ratio means a lesser probability of a debt default, while a ratio below 1.5 is considered a danger zone.

The data also suggests that most of the incremental borrowings have been used to fund working capital or maintain dividend payout despite poor profitability rather than finance asset creation or capex. Companies’ fixed assets were up just 3.4 per cent YoY last financial year, down from 3.9 per cent growth a year ago.

It’s the same in the public sector. PSUs’ combined borrowings are up 54 per cent cumulatively in the last three years, against 29.4 per cent growth in their assets during the period. At the end of March this year, listed PSUs had a total net debt of Rs 5.9 trillion, against Rs 3 trillion at the end of 2015-16. In all, India’s top listed companies owe nearly Rs 30 trillion to their lenders at the end of FY19, up by around Rs 6 trillion over the last three years.