Stock Fundamentals

Who all have pared their debt levels in H1-FY21

Keerthi Sanagasetti | Updated on December 12, 2020 Published on December 12, 2020

This screener looks at debt levels that is a good starting point for you to zero in on your investment choice

After Covid dented toplines and profits for India Inc., the markets expected debt levels of companies to increase. But an analysis of half-year balance sheets suggests that instead of assuming more debt, some leading companies substantially pared their debt levels in the first half of FY21.

Why debt reduction is important?

Last week, we shortlisted stocks based on their return on equity (RoE). This week we look at a parameter –– financial leverage (the fancy term for debt) – which if managed judiciously can provide a fillip to RoE . While borrowings can enhance equity return ratios for companies, assuming too much debt can turn lethal too.

High leverage usually hints at inadequacies in the business model whether in the form of long-pending customer receivables, or sub-optimal capital allocation decisions.

In this context, companies that have managed to reduce their debt levels in the first half of FY21, that too at a time when working capital stress has intensified with business being shut during the lockdown months, have definitely done a commendable job. While looking at deleveraging alone may not be the right way to zero in on your investment choice, this screener can sure be a starting point for you to undertake further research into the businesses, that we have highlighted below.


Other criteria

Using the Capitaline database, we shortlisted companies (excluding banks and finance companies) that have been able to bring down their loan funds in the September 2020 quarter compared to March 2020 levels, accompanied by a significant drop in their finance costs for the quarter. We considered only the S&P BSE 500 companies as a starting point to ensure adequate visibility and market interest.

Debt levels can vary substantially with the type of industry. For instance, the debt-equity ratios of capital-intensive industries such as power generation and transmission go up to 9.2 times. Whereas the same for asset light industries such as IT hovers between zero and 0.2 times.

Keeping this in mind, we further pruned this list of companies that reduced their debt by picking out those that had the best (lowest) debt equity ratio (as at end of September 2020) within their peer group in the sector.

Who made the cut?

Oil marketing companies that reported stellar numbers in the September quarter, despite subdued demand, also topped the list of companies that saw significant reduction in debt. Indian Oil Corporation, ONGC, BPCL, and HPCL – all pruned their debt by ₹8,000 to ₹28,000 crore in the first half of FY21. Among these, ONGC stands out with the lowest debt equity ratio of 0.5 times (outstanding debt balance of about ₹₹1 lakh crore as of September-end). In the first half of the year, the company pared down more than ₹12,000 crore worth of debt.

Interestingly, many top names that have seen the maximum drop in outstanding debt in the September quarter are from the stressed sectors – steel and power generation.

Within the steel industry, SAIL, JSW Steel, and Jindal Steel reported lower debt numbers in the recent September quarter. Of these, Jindal Steel with a debt equity of 0.9 times, made the cut.

Similarly, of the many names that popped up in the power generation and distribution sector, Power Grid Corporation made the cut with a debt-equity ratio of 2 times.

The next sector that saw a significant drop in debt levels was fertiliser producers – Rashtriya Chemicals and Fertilizers (RCF), Coromandel International, Chambal Fertilisers and Gujarat State Fertilizers and Chemicals (GSFC). Among these, Coromandel International saw the debt levels drop by ₹1,400 crore in the September quarter (over March 2020 levels). Not only did the debt-equity ratio of the company drop to 0.1 times (from 0.5 times in March 2020); but the company also saw its net profit double to ₹589 crore in the September quarter from ₹234 crore in March 2020 (also higher than ₹503 crore in the year ago period).

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Published on December 12, 2020
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