Indian companies appear to be living way beyond their means. The debt pile is so huge that nearly one in every three companies listed on the Bombay Stock Exchange (BSE) won’t be able to repay its loans even if it sells every single share.
Their state makes it difficult to raise more money, trapping them in a vicious cycle of high loans and fragile balance sheets.
An HT analysis shows that the loans of 30% of all companies listed on the BSE exceed their current market capitalisation.
Market capitalisation, arrived at multiplying the total number of shares with the current stock price, is a commonly used metric to gauge a company’s prospects.
A debt-to-market cap ratio of more than one is a sign that its loans have exceeded market value, signalling the company’s rising inability to repay its debts.
Some companies’ loan levels are more than 31 times or 3,000% their current market value, partly brought on by uncertain economic conditions over the past few years and a shaky world economy.
Alok Industries, a textile manufacturer, has a debt of almost Rs 20,000 crore, which is 31 times of its market capitalisation of less than Rs 700 crore.
Infrastructure companies appear to be the worst hit.
GVK Power and Infrastructure’s debt of Rs 24,785 crore is 27 times its current market value of less than Rs 1,000 crore. The total loans of Jaiprakash Associates, a real estate and infrastructure company, stand at Rs 58,250 crore against a market capitalisation of less than Rs 2,000 core.
One in every four or 25% of all “stressed loans” — loans that have turned bad plus those that have been restructured to enable payment terms — involve infrastructure companies, according to Reserve Bank of India (RBI) data.
The RBI recently came up with Sustainable Structuring of Stressed Assets, a system that allows banks to partly own borrower companies. But with such low market valuations of these companies, lenders will be able to bring back only a fraction of their loans.
Analysts cautioned many lenders may be forced to opt for a “haircut” or forego part of their principal and interest rates to prevent these loans from turning bad.
“Haircuts on debt are inevitable to provide any hope for these assets to turn around,” said Rakesh Valecha, senior director and head of credit and market research, India Ratings.