Has India Inc.’s debt burden eased?

The last two to three years has been action-packed for India Inc. and banks, to say the least. While large corporates in key sectors have been busy shedding their unwieldy debt, banks have been untiringly spring-cleaning their stressed and bad loan accounts. The upshot: A leaner balance sheet for both India Inc. and banks.

The pace of debt accumulation had slowed down considerably in FY16 but is marginally inching up over the past two years. At the aggregate level, while the numbers look less daunting, is India Inc. really less indebted than before? Are the debt woes easing up for troubled sectors such as infrastructure, power, steel and telecom?

We dig into numbers of 1,197 NSE listed companies (for which data is available) to gauge how India Inc. is riding out the debt crisis. Here are our findings.

The aggregate picture

Debt accumulation slows……

Much of the origin of the NPA problem in banks and India Inc.’s indebtedness lies in decisions taken during the mid-2000s. With the Indian economy booming, companies lined up aggressive capex plans, financed by the credit boom. In a span of just three years, from FY05 to FY09, bank credit doubled. Loans continued to grow at a stellar pace even in the years following the 2008 global financial crisis.

Hence, to understand the big picture on India Inc.’s indebtedness, we break the aggregate data into three periods — FY10 to FY14 (fast pace of debt accumulation); FY14 to FY16 (slowdown in debt accretion); FY16 to FY18 (debt accretion inches up).

Between FY10 and FY14, the debt for the sample NSE listed companies grew by 21 per cent CAGR (compounded annual growth rate). The pace of debt accumulation was higher in core sectors such as infrastructure, power and telecom.

Between FY14 and FY16, however, debt accumulation slowed sizeably — growing by 4 per cent CAGR for the NSE listed companies.

For top borrowers such as Bharti Airtel, L&T, Adani Power, Bhushan Steel, Lanco Infratech, debt accretion slowed down drastically from over 30-40 per cent CAGR between FY10 and FY14 to lower teens and single-digits between FY14 and FY16. A few others such as Adani Enterprises had shed significant debt during this period.

…but inches up lately

In the last two years, debt accumulation has started to inch up slowly — though not at an alarming rate. Tapering off from seven-odd per cent growth in FY15, debt levels were flat in FY16. In FY17 though, debt levels for the 1,197 NSE listed companies grew by little over 4 per cent.

Data for FY18 is available only for 656 companies and, hence, may not be strictly comparable to numbers discussed for the earlier years. However, given that these companies have been constituting the chunk — about 70 per cent of the total debt — the underlying trend remains the same.

According to this data, for the 656 companies, after the aggregate debt remained flat in FY16, it grew by about 7.7 per cent in FY17 and 6.7 per cent in FY18. This implies that the pace of debt accretion in FY18 has been similar to that in FY17.

A sectoral and company-wise analysis of this debt trend is discussed later in the article.

Overall leverage moderates…

Even as Indian companies set out ambitious expansion plans in the boom years, the euphoria gave way to prolonged slowdown, and corporates with huge debt struggled to generate cash flows to meet interest payments. The debt-equity ratio for the NSE-listed companies went up from 0.7 times in FY10 to a little over 1 times in FY14, while their interest cover halved to 3.3 times (from six times in FY10).

In FY10, the number of companies that had debt-equity ratio of more than three was 93 (of the 1,197 listed companies). This number went up to 111 in FY14. Similarly, the number of companies with debt-equity of over five had doubled from 28 to 56 in this period.

The extent of over-leverage eased up somewhat in FY16, with number of companies with debt-equity ratio of more than three and five falling to 88 and 47 respectively.

A look at the numbers over the past two years suggests that, at an aggregate level, the leverage for India Inc. has moderated, with debt-to-equity at 0.9 times for 1,197 NSE companies in FY17 and 0.8 times for the 656 companies in FY18. Interest cover too, which continued to dip in FY16, bounced back to three times in FY17 (and four times for 656 companies in FY18).

… indebted firms on the rise

Even as the overall picture appears to have improved, more companies appear to have slipped into the highly-leveraged bucket between FY16 and FY18. Companies with debt-equity ratio of more than three and five inched up to 90 and 54 respectively in FY17; the smaller 656 companies list for FY18 also shows a significant jump in the number of over-leveraged companies vis-à-vis the previous year.

Also, despite the pace of debt accumulation slowing in FY16, weaker companies have only turned weaker, evident from the increase in the number of companies with negative net worth. From a tally of 29 in FY10, the number of companies with negative net worth increased to 95 by FY17.

The companies with negative net worth included Lanco Infratech (as of September 2017); Era Infra Engineering (as of FY17); and GVK Power & Infra, MTNL, Tata Teleservices (Maharashtra) as of FY18.

Lanco Infratech and Era Infra are among the first 12 companies referred to the NCLT. Recently, NCLT directed initiation of liquidation process for Lanco Infratech.

The granular story

On the rise

As mentioned above, after debt accretion halted in FY16, there has been marginal pick up in the pace of debt increase over the past two years. A look at the top 50 borrowers’ accounts in the 1,197 NSE-listed sample, reveals that oil companies and refineries saw a significant increase in debt levels over the past two years.

IOCL, for instance, has seen its debt (includes long-term and short-term borrowings and current maturities of long-term debt) creep up from about ₹58,000 crore in FY16 to around ₹65,000 crore in FY18. HPCL and Reliance Industries too saw debt go up notably in the past two years. But for most of these players, debt-equity is at best a little over one times and interest cover is comfortably at high single-digits or double-digits.

But increase in debt levels in other sectors and companies is not that comforting. Telecom, for instance, has seen debt continue to rise even during FY14 and FY16, when others were trimming their borrowings. The trend has continued over the past two years as well. Bharti Airtel, Idea Cellular, and Reliance Communication — all have seen a steady rise in debt over the past few years.

For Idea Cellular, debt has increased from about ₹40,000 crore in FY16 to around ₹57,000 crore in FY18. The National Company Law Tribunal (NCLT) recently approved the merger of Idea Cellular and Vodafone; the combined net debt of the new entity, as per the information provided by the company, is over ₹1 lakh crore as of June 2018.

Airtel’s consolidated debt figure is about ₹1.1 lakh crore as of FY18, while for Reliance Communications, it is over ₹45,000 crore. Interest cover is less than 1 to 1.5 times for these players. Idea Cellular and Reliance Communications made loss at the PBT (profit before tax) level in FY18.

Losing power

For few power companies, the debt has gone up steadily over the past two years. Tata Power’s debt, for instance, has gone up from about ₹40,000 crore in FY16 to around ₹48,500 crore in FY18. The company’s net debt/equity stood at 2.8 times in FY18. For Adani Power, while its debt has not gone up much over the past three years, at around ₹52,000 crore, debt levels are still worrisome. Debt-to-equity ratio is over 50 times for the company and interest cover is an abysmal 0.6 times.

Interestingly, for KSK Energy Ventures, a company with high debt-to-equity and low interest cover, its debt reduced drastically by over ₹20,000 crore in FY18, mainly due to de-consolidation and disposal of some of its subsidiaries/plants. Post the RBI February circular and lenders’ decision to consider the change in management outside NCLT, lenders have invoked shares in the company’s subsidiaries. De-recognising the related values of assets and liabilities of these subsidiaries has led to the sharp decrease in debt. The RBI’s February circular for stressed assets essentially did away with all the old restructuring schemes, and mandated banks to draw up resolution plans within 180 days, failing which they will have to refer the cases for insolvency under IBC.

The Allahabad High Court recently denied interim relief to power companies from the RBI’s February diktat. The worry is that a chunk of these stressed assets will now take the insolvency route. The structural issues plaguing the power sector — non-availability of fuel, projects set up without linkage, lack of PPA, tariff-related disputes — can make it difficult to find buyers under IBC, leading to liquidation.

But the Centre’s recent decision to warehouse stressed power projects under an asset reconstruction company under the -- Power Asset Revival through Warehousing and Rehabilitation (Pariwartan) -- scheme could offer some respite. This will ensure that the value of the assets is protected and will prevent their distress sale under IBC. How this will impact individual power companies needs to be seen.

What under IBC

While debt levels have not gone up over the past two to three years for construction companies, debt worries of companies such as HCC, Era Infra Engineering, Patel Engineering, Punj Llyod, JP Associates have been in focus.

For HCC, lenders have implemented the S4A restructuring scheme (Scheme for Sustainable Structuring of Stressed Assets). The RBI’s February circular has no direct impact, as the scheme is under implementation. However, this implies that all resolution plans which were under the process of finalisation under any of the earlier schemes — like the one for HCC’s subsidiary, Lavasa Corporation Limited — requires revision. Very recently, the NCLT admitted a plea filed by operational creditors who initiated the insolvency process against Lavasa under IBC. As the principal investor (68.7 per cent stake) in the project, it needs to be seen if HCC is able to find buyers for Lavasa under IBC.

Era Infra Engineering that owes lenders over ₹10,000 crore has been admitted for insolvency under IBC, and proceedings are yet to gain momentum. In the case of JP Associates, the Supreme Court recently allowed the RBI to direct banks to initiate insolvency proceedings against the company.

Within Infra, while the pace of debt accretion has slowed down considerably — even shrunk in a few cases — low interest cover and high debt-to-equity are a concern. Many of them are under resolution outside or under NCLT; still others may end up under NCLT, post the RBI’s February circular.

GVK Power & Infra has over ₹12,000 crore of debt at the consolidated level, as of FY18. The company reported a loss in FY18 and has a negative net worth. In its notes to accounts, the company states that the loan balances of its subsidiary GVK Industries Ltd (GVKIL) and jointly-controlled entity, GVK Gautami Power Ltd (GVKGPL), has been classified as NPAs by lenders. It is working at a one-time settlement proposal with the lenders.

For GMR Infra, while the debt has come down substantially from ₹47,000 crore levels seen in FY15 to about ₹23,000 crore in FY18, debt-to-equity is still a worrisome 4-5 times and interest cover about 0.6 times. The debt pertaining to two of the company’s power plants — GMR Rajahmundry Energy and GMR Chhattisgarh Energy — was restructured under SDR, whereby the banks have converted part of their debt into equity and now hold a controlling majority in these companies. In view of the RBI’s February circular, reports suggest that resolution of these accounts is under way. It needs to be seen if these get referred to the NCLT. For IL&FS Transport, debt has been steadily rising and its debt-to-equity is over seven times in FY18.

The insolvency proceedings of Jaypee Infratech, which was admitted by the NCLT last year, was put on hold by the Supreme Court in the interest of home buyers. Very recently, the Supreme Court has directed re-commencing of the insolvency process.

The steel sector has been seeing a lot of action, with five out of 12 companies that were referred by the RBI to NCLT under the first list, being steel companies. Of these, three have seen successful resolution under IBC, which has led to substantial de-leveraging for the sector as a whole, even as banks have had to take huge haircuts.

Bhushan Steel, for instance, owed lenders about ₹56,000 crore. Tata Steel has taken over Bhushan Steel under the IBC process with a settlement amount of ₹35,200 crore (37 per cent haircut).

Before the deal, Tata Steel’s gross debt, as of March 2018, stood at ₹92,147 crore. The company has taken an additional ₹16,413 crore debt to fund the takeover of Bhushan Steel. Hence, after other adjustments, the company’s gross debt stood at ₹116,615 crore as of June 2018.

In case of Electrosteel Steels too, the company owed lenders about ₹14,000 crore. Vedanta acquired control over Electrosteel Steels under IBC, paying a consideration of ₹5,320 crore, at a higher haircut of over 60 per cent. According to the company’s transcript, the net debt of Vedanta, as of June 2018, was at $10.7 billion, higher than $9.6 billion as of March 2018, primarily on account of acquisition of Electrosteel.

For Monnet Ispat & Energy, a bid submitted by a consortium comprising AION Investments Private II Limited and JSW Steel Limited, has been approved, which entails a total consideration of about ₹2,800 crore against over ₹10,000 crore of dues owed by Monnet.

At an aggregate level, as more accounts get resolved under IBC, there could be significant de-leveraging for India Inc.

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