Bad money good money: Companies find decision-making difficult

Financial year 2016-17 will be taxing for debt stressed firms to lower their obligations.

Financial year 2016-17 will be taxing for debt stressed firms to lower their obligations. However cash-rich companies also find decision making as tough as their high-debt peers.

Bad money

The rout in commodities, severe slowdown in demand and global uncertainties, all made the last financial year 2015-16 more challenging than the previous FY15. The Reserve Bank of India’s new bad loans recognition and provisioning norms, stringent as never before, made banks wary of refinancing old corporate debt. The story is, by any chance, not new. Even before FY16 and FY15, in FY14 for instance, listed companies in India had to wade through a slow-moving global and domestic economy amidst high interest rates in the domestic banking and financial system.

In retrospect, it becomes apparent that FY15 was the only time in the last five years where sentiments of Indian companies had risen somewhat on the back of expected boost in the domestic economy. But it is not very often that one sees this august club get wise to risks in the system and not get carried away by unsubstantiated euphoric statements. As a result, the unserviceable part of piled up debt kept rising. It sort of exploded in FY16, thanks partly to the RBI’s new disclosure norms for banks on bad loans in the banking system.

Whether more or less, one cannot be sure, but a part of the rising debt levels were not creating new assets and were instead getting used to service or refinance old debt. So, when we scanned the debt levels of listed companies (see methodology), excluding banks and finance companies as of the end of FY16, we found no dearth of them.

Four out of five companies, or about 80 per cent of the industry under survey, were net debt positive. In 2013 and 2014, when Financial Chronicle had carried out a similar analysis, about 75 per cent of companies were seen to be net debt positive in each of the two years. More companies, therefore, appear to be facing the risks of falling into a debt trap.

After further filtration (see methodology) there were 179 companies whose net debt to total assets ratios were analysed. Collectively, these 179 companies’ net debt amounted to Rs 23,12,500 crore, which was 36 per cent of their total assets size.

More than one-third of assets, in the form of net debt, indicated a higher leverage level. In our accompanying story, the aggregate net cash to total assets was 21 per cent. So, among the major high debt and cash rich companies, the former was much ahead in terms of intensity levels.

Debt borrowings are ideal for building long-term capital assets or for short-term working capital needs, in order to drive growth in earnings. The debt to assets ratio helps gauge the scale and effective utilisation of borrowed funds by a company.

When this ratio is very high, it means effective utilisation is not happening, leaving the company more susceptible to external shocks such as sectoral slowdown and internal anaemia.

In our analysis, the 10 companies whose total debt, as a proportion of their total assets was the highest, include – Hanung Toys & Textiles (365.8 per cent), Shri Lakshmi Cotsyn (165.5 per cent), REI Agro (136.7 per cent), Electrotherm (India) (134.5 per cent), SL (127.4 per cent), Suzlon Energy (105.4 per cent), Moser Baer (India) (97.8 per cent), Ramsarup Industries (91.9 per cent), Visa Steel (86.1 per cent) and Hotel Leela Venture (84.9 per cent).

Three metals sector companies — PSL, Ramsarup and Visa — followed by two textiles sector companies, Hanung and Lakshmi Cotsysn, dominated the list. REI Agro was into food processing, while Electrotherm and Suzlon belong to the engineering and power sectors respectively. Moser Baer is into IT hardware and Hotel Leela, as the name itself suggests, comes from the hospitality industry. The top 10 companies in our September 2014 list, the same analysis done in Financial Chronicle’s weekend edition, had debt to assetsratio ranging from 94.4 per cent to 154.9 per cent.

This time, the range is from 84.9 per cent to 365.8 per cent, indicating a stretch at both the ends. Two years ago, seven of the 10 toppers had debt to assets ratio exceeding 100 per cent. This year, it is a tad better at six companies.

Hanung Toys and Textiles, with the highest debt to assetsratio of 365.8 per cent and primarily into import and export of textile products, had a standalone net debt of Rs 2,853 crore against an asset size of Rs 780 crore. Given that it incurred an operating loss of Rs 627 crore in FY16, the company seems to be perched precariously.

Hanung did not respond to our e-mailed queries and its official phone lines were unreachable. Another textile sector company, Shri Lakshmi Cotsysn, had the second highest debt to assets ratio of 165.5 per cent, with net debt and total assets of Rs 3,333 crore and Rs 2,014 crore respectively, on a standalone basis.

A senior company official, who did not wish to be named, told Financial Chronicle that the company’s net worth was eroded and it was a BIFR case under the Sick Industrial Companies Act. “We are trying to find the right type of investors, and at this stage, can not comment any further,” he states.

What makes our top 10 list of debt-laden companies interesting is that there are two index companies in it. Hotel Leela Venture and Suzlon Energy are constituents of the Nifty 500 index.

Hotel Leela had the tenth largest debt to assetsratio of 84.9 per cent with a consolidated net debt size of Rs 4,213 crore against total assets of Rs 4,962 crore. It earned an operating profit of Rs 141 crore in FY16. Hotel Leela, however, declined to reply to our queries.

The problem was less severe in Suzlon Energy although it had a higher debt to assets ratio of 105.4 per cent, with consolidated net debt of Rs 10,507 crore against total assets of Rs 9,967 crore. In FY16, the company earned an operating profit of Rs 2,098 crore.

Suzlon Energy, through its spokesperson, did get back to us with an extensive reply saying that the increase in debt to asset ratio was primarily due to sale of assets affected by Suzlon to attain deleveraging. “Needless to say, the sale of Senvion is a landmark transaction for Suzlon that enabled it to attain significant deleveraging and re-entry into profit as reflected in our FY16 results,” it said.

“Our credit rating was revised to investment grade (BBB-) and lenders extended additional working capital lines. Due to all these efforts, we have improved our operational performance, the volumes have ramped-up and we are finally, back in the black,” the company points out, triumphantly.

It claimed its debt balance had a long and back-ended maturity profile, which could be met comfortably from operational cash flows. Helped by the liquidity support it had to ramp up business and generate cash flows.

Five companies on our list, REI Agro, Electrotherm, PSL, Moser Baer and Ramsarup, with the third, fourth, fifth, seventh and eighth highest debt to assetsratio, did not respond to our queries.

Among them, PSL and REI Agro had suffered operating losses in FY16 to the tune of Rs 1,182 crore and Rs 925 crore respectively, making them highly stressed cases.

Visa Steel, with the ninth highest debt to assets ratio of 86.1 per cent, earned a consolidated operating profit of Rs 5 crore in FY16. At the end of the year, its net debt was Rs 3,252 crore, against a total asset of Rs 3,776 crore.

Replying to our queries extensively, Visa Steel’s vice chairman and managing director, Vishal Agarwal, says, “The company plans to reduce debt by raising funds through strategic and financial investors. The company already has Baosteel, China as a strategic investor in the ferrous chrome business and SunCoke Energy, USA as strategic investor in the coke business. The company plans to induct a strategic investor in its special steel business for which it is in the process of transferring it into a wholly owned subsidiary.”

Agarwal points to operating profit margins of steel companies getting adversely impacted due to various external factors, including failure of the commitment made by the respective state governments through MoU, to grant captive iron ore mining lease, de-allocation of coal block by the ministry of coal and various court orders pertaining to mining bans.

Adding fuel was the sharp fall in steel prices due to overcapacity in China, Agarwal said.

Clearly, there are varied reasons behind the highest debt to assets ratio of the 10 companies on our list. But one thing is for sure; they, along with others following them in our analysis, will not find it easy to be able to get refinancing help or additional loans from the banks. Some of them might have to just sell off their assets like Visa Steel is doing.

In a report on corporate India’s debt in May, State Bank of India’s chief economic adviser, Soumya Kanti Ghosh, stated, “Our estimates show that credit to stressed sectors, which grew at 5.9 per cent in FY15, decelerated to 2.6 per cent in FY16. We, however, believe credit growth is unlikely to revive materially in the near term as demand is still significantly a laggard in the system.”

The report stated that lenders were now aggressive to hive off non-core assets and diffuse the debt bloat. “We estimate that nearly Rs 2,00,000 crore of asset sales are in the pipeline or are already completed by debt-ridden companies with a debt exposure of around Rs 10,00,000 crore,” it noted.

The current financial year, and the next few ones, will indeed be very challenging for the debt-stressed companies to bring down their debt levels and debt-to-assets ratios.

Good money

In India, there are some companies, which occupy a place under the sun for the simple reason that they constitute a rarity in a world dominated by high debt stress. When we scanned our analysed universe of listed companies for cash rich companies, we came up with a short list. On further filtering, we were left with even a shorter one.

The system works like this. Companies seeing steady cash flows from sales and recording profitability consistently, end up piling up cash reserves year after year. While cash reserves are a sign of sound fundamentals, the trouble arises when it ends up dominating the assets side of corporate balance sheets.

Investors sense things going out of control when dividends are low or missing altogether, and when inadequate attempts are made by the company management to tap into business expansion or potential acquisition opportunities.

Ambit Capital’s CEO-institutional equities Saurabh Mukherjea, believes a high cash level only indicates good financial health, but it is not necessarily a driver of good health. “Having large cash in its balance sheet is fine, but if a company is allocating capital poorly, then for the investors the return on capital employed is also going to be poor.”

In our analysis (see methodology) of 1,380 listed companies, only one out of every five companies, or 268 firms to be precise, had positive net cash as of the end of financial year 2015-16 (FY16).

Decent-sized net cash positions were even rarer — there are only 38 companies with net cash of Rs 750 crore and more.

The 10 companies whose March-end cash-assets ratio, net cash (cash minus debt) as a percentage of total assets, were the highest, were Orissa Minerals Development Company (whose cash-assets ratio was 85.4 per cent), MOIL (76.5 per cent), Engineers India (62.9), Oswal Green Tech (61.0 per cent), GlaxoSmithkline Consumer Healthcare (60.3 per cent), Info Edge (India) (52.5 per cent), Abbott India (51.7 per cent), Oracle Financial Services Software (48.1 per cent), Glaxosmithkline Pharma (44.2 per cent) and Lakshmi Machine Works (44.1 per cent).

It was a motley mix of sectors with two companies each from the metals and pharma sectors and one firm each from engineering consultancy, construction sector, fast moving consumer goods (FMCG), space, information technology (IT) and capital goods.

Topping our cash rich list are OMDC and MOIL, both public sector undertakings (PSUs) who are in the mining and metals sector. It is quite interesting for metal companies to have very high cash-assets ratio, given that the sector has undergone one of the toughest phases in the last couple of years.

In our accompanying story on high debt companies, the other end of the spectrum had three metal companies in the top 10 list.

Therefore, to understand how they have managed to stay cash-rich, Financial Chronicle contacted OMDC and MOIL, but they did not respond to our queries.

At the end of March, OMDC’s standalone net cash was Rs 799 crore against its total assets size of Rs 936 crore, while MOIL had higher standalone net cash of Rs 2,850 crore against assets worth Rs 3,728 crore.

OMDC’s financial statements give its key operating segments as iron ore, manganese ore and sponge iron, but all its operating revenues are categorised as unallocated.

In FY16, its total income from operations was Rs 60 crore, down 20 per cent from 75 crore. As per Capitaline database, OMDC’s operating profit fell by 25 per cent to Rs 26 crore in FY16, while its net profit (adjusted for extra-ordinary items, if any) fell by 40 per cent to Rs 11 crore. Thus, the topper in our cash rich list clearly demonstrated very weak operational performance.

The case was similar with MOIL, the second in our top 10 list, with however, much higher revenue realisations. Capitaline data showed its standalone net sales in FY16 to have declined by 24 per cent to Rs 629 crore, while its operating profit and net profit slid by 54 per cent each to Rs 323 crore and Rs 194 crore, respectively.

The third company at the top of our list was also a PSU — infrastructure consultancy company Engineers India. Its consolidated net cash was Rs 2,613 crore against its total assets of Rs 4,158 crore at the end of FY16.

Analysts say in the company’s core segment of engineering, procurement and construction projects, it outsources construction activity to third parties. It lacks its own assets like machinery, cranes and tools.

In addition, Engineers India saw limited need and necessity for asset deployment. In FY16, the company clocked declines of 12 per cent, 15 per cent and 16 per cent in its consolidated net sales, operating profit and net profit to Rs 1,525 crore, Rs 425 crore and Rs 262 crore, respectively.

Whether Engineers India’s strong cash reserves helped buffer the weakness in its line of business or not, was not immediately clear. We asked the company and a senior official did acknowledge our emailed queries, but was not able to respond adequately.

Operational performance was not weak for just the three companies on the top of our cash rich list. It was seen to be quite poor in two other cases as well. Info Edge (India), a service industry company, which runs the popular job portal Naukri.com, had the sixth highest cash-assets ratio of 52.5 per cent at the end of FY16.

But in that year, Capitaline data of its consolidated financials showed that it recorded an operating loss of Rs 370 crore against an operating profit of Rs 107 crore in the previous year. From a net profit of Rs 23 crore in FY15, it went to record a net loss of Rs 124 crore in FY16.

Notably, however, Info Edge’s net sales increased sharply by 28 per cent to Rs 938 crore in FY16. The company did not respond to our queries.

Glaxosmithkline Pharma, one of the three companies in our top 10 list, which were also constituents in the Nifty 100 index, had the ninth-highest cash-assets ratio of 44.2 per cent. But, in FY16, its consolidated net sales declined by 16 per cent and its operating profit and net profit fell by 23 per cent and 27 per cent, respectively. Our queries to the company went unanswered.

The other pharma company on our cash rich list was Abbott India (a small cap company) with sixth-highest cash-assets ratio of 51.7 per cent, which experienced a better FY16 as per its standalone financials.

All the three key parameters of net sales, operating profit and net profit went up by 15 per cent, 16 per cent and 13 per cent, respectively. The company did not share its views in response to our queries.

Oswal Green Tech, whose industry classification in Capitaline database -was “construction factories /offices/commercial,” had the fourth highest cash to assets ratio of 61.0 per cent.

While the company did not reply to our queries, its consolidated financial data from Capitaline showed a five per cent fall in operating profit and a 18 per cent increase in net profit.

FMCG company GSK Consumer Healthcare and IT firm, Oracle Financial Services Software or OFSS, too did not share their perspectives on their respective cash-assets ratios of 60.3 per cent (fifth-highest) and 48.1 per cent (eight highest).

GSK Consumer’s standalone operating profit and net profit grew by 17 per cent each in FY16, while OFSS saw its consolidated operating profit go up marginally by one per cent and net profit declined to a limited extent by one per cent in FY16.

Lakshmi Machine Works (LMW) had the tenth highest cash to assets ratio of 44.1 per cent. Its chief financial officer, CB Chandrasekar, told Financial Chronicle that his company has been debt free since FY15 and that part of the cash balance included the customers’ security deposit, which got adjusted on delivery. “All capex requirements are met out of internal accruals. The company has a consistent dividend payout policy,” he says.

What was noteworthy was Chandrasekar’s confidence that liquidity in cash will enable his company reach faster business decisions in future. That may very well be true — at least for those companies with high cash-assets ratios.

Companies which did not make it our top 10 list, but came close, included the second largest listed IT company in the country, Infosys, which had the 11th highest cash to assets ratio of 43.4 per cent in our analysis. Following it were Bharat Electronics, NM-DC, Whirlpool India and Pfizer with cash to assets ratios of 40.6 per cent, 40.0 per cent, 38.0 per cent and 35.1 per cent, respectively.

(This story originally appeared on Financial Chronicle)