Cos debt-equity ratios improving marginally: StanChart

Latha: In your own words tell us the summary of this-give us the details of the extent of debt, is it as bad or worse than it was in the 2000-2003 upturn that the economy saw and therefore is that proving to be one of the big stumbling blocks for growth?

A: In fact we start with saying that there are three cyclical headwinds which probably we underestimated, one is corporate leverage, the second is levels of capex utilisation and the third is high level of banking system NPAs. In this report we particularly look at the corporate leverage part of it, probably we will get time to do the next two in some other reports. Now, if I just look into the corporate leverage part of it, we have broken this up into two periods. One is pre-global financial crisis period, the other is the post-global financial crisis period and it is interesting that in the pre-global financial crisis period, while debt went up very strongly, it was also backed by a significant amount of equity raising, so the overall financials were not so stressed whereas in the post financial crisis period, we have not only seen less amount of equity raising but also profitability declining very sharply. So we see a profit after tax (PAT) growth of only 9 percent against a debt growth of almost 20 percent, so that is putting much more stress on the financial statements of the corporates and the way out from here to our mind is simply that either we will have to deleverage or the growth expectations will have to pick up or there should be significant amount of public investments. We do not think that rate cuts are necessarily a big solution to this problem because we find that between the first phase pre-global financial crisis and post-global financial crisis, real interest rates have declined almost 600-650 basis points but still overall investment has not picked up in the second phase because growth expectations have been much more moderate.

Sonia: That is quite a grim situation that you have laid out. Since you have done a lot of work on this corporate debt situation, can you give us some numbers? What was the gross-debt of the BSE 500 companies by the end of FY15 and how much do you expect it to rise to say by the end of FY16?

A: Just to give you some perspective here, in 2003 the gross corporate debt was about Rs 2.3 trillion, this has gone up almost ten times to now about Rs 24.3 trillion by the FY15 end, so it is almost a ten fold increase that we are seeing and the growth rate in the second phase post global financial crisis phase has been about 18 percent in corporate debt whereas in the first phase pre-global financial crisis, the growth rate was more than 40 percent. So the growth rates have come down if you extrapolate that for the next year also, you would probably get a number of about Rs 26-27 trillion for the overall debt but the good news is that between FY1 and FY15 we see that the debt ratios are improving marginally. We are not yet saying that this is good enough but the kind of trend that want to see has started happening in the last one year or so.

Latha: Can you extrapolate more on, are you seeing at least at the edges some improvement? How much has debt fallen and how much has equity been raised?

A: Debt has not fallen, it is just that the debt-equity ratio is improving marginally from about 1.39 to about 1.34 in one year which is a marginal improvement. Also what we are seeing is that and this is one of the problems that we find is if you compare the equity raising in FY15 vis-à-vis the market valuations, then we find that that has been very poor compared to the historical records that we have. So probably companies did not utilise the opportunity enough last year of raising capital and thereby reducing their leverage.