Moneycontrol Pro Panorama | Debt is not a four-letter word any more

Companies and their managements have become wary of high debt and have taken conscious steps to deleverage which significantly improved debt metrics.

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

One current risk that financial experts highlight is the impact of high interest rates on companies and governments. Companies are yet to adjust to new interest rates. Central banks may have hit the pause button on rate hikes, but they are far from reverting to ultra loose monetary policy, goes the argument. The latest updates from S&P Global Ratings and ICRA hold some answers on these issues that are pertinent to investors.

Companies and their managements have become wary of high debt and have taken conscious steps to deleverage over the past three years. This has significantly improved debt metrics, reducing the risk from high interest rates. “By our forecasts, the median debt to EBITDA for our rated portfolio (excluding IT and infrastructure/utility companies) will fall to about 2.4 times by March 2024 from about 2.7 times the year before. This is a significant decline from 4.3 times as of March 2020,” S&P Global said in a note. EBITDA is earnings before interest tax depreciation and amortisation.

By the nature of their business, infrastructure and utility companies tend to have high leverage. Even this set of companies is projected to see a reduction in leverage ratios, thanks to expansion in their earnings base.

Progress on the debt front is well illustrated by ICRA. As a percentage of GDP, external debt of non-government sectors declined from about 17 percent in FY20 to 14.8 percent in FY23. In FY15, external debt of non-government sectors as a percent of GDP stood at 19.4 percent. Though the absolute debt of the government and non-government sectors rose in FY23, the aggregate share of external debt in GDP eased in FY23 from FY22 and FY20.

These data points may explain why investors are not attaching too much importance to the risk from elevated interest rates. Moreover, thanks to the return of foreign investors, benchmark equity market indices are scaling new highs. Read Shishir Asthana’s piece to find out if the current rally in the equity market has more steam left.

On the debt front, resilient earnings may aid credit metrics of companies. However, the pace of improvement may slow due to resumption of capital expenditure investments and an economic slowdown.

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R Sree RamMoneycontrol Pro