Thursday, December 17, 2009

India Inc is not deleveraging at all

World over the private sector is reducing its debt but in India, the party is still not over. Companies, especially small by size, are continuing their debt binge. Even the banks are lending without strict lending norms as can be seen in case of many companies.

The total outstanding debt of 473 BSE SMALL CAP Index companies stood at approximately INR 1,68,000 Crore at the end of FY09. This only includes debt of standalone non-financial entity. BSE SMALL CAP index's total market cap is just INR 3,22,680 Crore, with P/E of 17.68 and P/B of 2.13. This indicates that net profits of BSE SMALL CAP index would be around INR 18,250 Crore (and lower if we exclude financials) and Book value around INR 1,51,500 Crore (and lower if we exclude financials). Thus the total outstanding debt is even more than the book value (or net worth or shareholders' equity) giving debt/equity of 1.1 (higher if financials are excluded). Since the interest rates are low right now and the profitability of many companies is above average, the companies have been able to bear their interest burden. Reverse the two and the situation will become completely different. If interest rates increase and operating margins contract, the outcome will be nothing but horrible. Even with the current scenario, it will take more than nine years for companies to pay their debt completely. The only thing difficult to predict is the timing. The real punishment will be to the banks since their assets will deteriorate.

Compare this to companies belonging to BSE 500 index. The total outstanding debt of 500 BSE 500 Index companies stood at approximately INR 7,68,000 Crore at the end of FY09, excluding that of financials, 4.5 times that of BSE SMALL CAP index companies. The total market cap of BSE 500 is at INR 55,00,000 Crore, i.e. 17 times that of BSE SMALL CAP index. The P/E of 21.16 and P/B of 3.79 gives net profits at INR 2,60,225 Crore and book value of INR 14,57,102 Crore. Thus total outstanding debt is much less than the book value, with debt/equity at 0.53. It will take just three years of profits to pay the debt completely.

This puts BSE500 companies in much stronger position than that of BSE SMALL CAP. This is just a conclusion based on average. The individual companies may vary. Also notice the fact that some companies like, 3i Infotech, Alok Industries are present in both the indices. This is just to highlight the fact that investing in small companies is riskier than that of larger ones. Even when it comes to restructure debt, the banks would provide favourable terms to big companies compared to smaller.
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RK said...

excellent statistics! do you do these with the excel sheet that you mentioned in the other post?


Saif said...

very interesting statistics chinmay...the attention to detail is quite impressive ..looking forward to more posts..

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