In the shadow of Covid, India Inc. reduced its debt like never before
For Indian companies battling the covid pandemic, fiscal year 2021 was not just about streamlining costs; it was also about repairing their leveraged balance sheets. An analysis of the top 15 industries, representing more than 1,000 listed companies, by the State Bank of India (SBI) Research Department, showed that companies reduced their debt by more than ₹$ 1.7 trillion in FY21. In perspective, this amounted to one-fifth of their debt at the end of FY20. Never before has India Inc. reduced its debt so drastically, market experts said, adding that leverage was now at an all time high.
“At the start of the pandemic in 2020, there were fears of corporate distress, but some favorable factors helped companies straighten their balance sheets in fiscal year 21. Due to support from global central banks in the form loose monetary policy and stimulus measures, there was excess liquidity, which kept equity market sentiment positive. So we’ve seen companies raise funds through IPOs and other channels and use partial proceeds to pay down their debt, ”an analyst from a multinational brokerage said on condition of anonymity.
SBI Research economists point out that not only stock markets, primary bond issuance also rose 9% in FY21, as companies repay their high-cost loans by raising funds through obligations. Simply put, because of lower returns, they could borrow funds at a lower rate and lower their finance cost. Another factor that is likely to have given savings a boost is the delay in expansions. Analysts say that since the pandemic forced companies to postpone their capital spending plans, they may have used funds set aside for expansion to pay off debt.
The general posture of belt-tightening post-covid has also resulted in savings on costs and working capital.
“Given the uncertainty of demand, we don’t expect companies to go out of their way to build inventory, which is likely to keep working capital requirements low,” said Shankar Subramaniam. , Managing Director and Head of Global Transaction Services India, Bank of America.
To keep operating performance intact, companies have embarked on extensive cost-cutting measures. They also saw significant savings in discretionary costs related to ad spend and travel costs, which helped improve cash flow.
There was also help from other sources. “Our multinational clients operating in India have obtained additional liquidity from parent entities (given the large impact of covid in India), allowing them to reduce debt on their local books. Despite lower interest rates, our loan portfolio has not grown significantly compared to last year as clients prefer to either rely on parent companies for funding or not borrow money. everything, ”Subramaniam added.
Among the sectors, refining, steel, fertilizer, mining and mineral products and textiles companies alone reduced their debt by more than ₹$ 1.50 trillion in FY21, SBI Research analysis showed. The refining segment led the way, where the numbers were likely driven by the significant fundraising and deleveraging of Reliance Industries Ltd.
As a result, the net debt-to-equity ratio, a measure that indicates the strength of a company’s balance sheet, fell to its lowest level in several years.
An analysis of BSE500 companies excluding financial services by Motilal Oswal Financial Services Ltd showed that this parameter fell to 0.51 times in FY21, down from 0.73 times the previous year.
The significant deleveraging has undoubtedly improved investor morale. Investors tend to avoid exposure to companies with tight balance sheets and prefer those with minimal leverage or no cash. According to Samit Vartak, founding partner and chief investment officer at SageOne Investment Advisors LLP, the streets have rewarded companies that have seen their debt fall dramatically. “The valuations of large and mid-cap companies that have experienced significant deleveraging have improved considerably. We don’t expect companies to speed up their investment plans to full blast, but if capacity utilization improves further, companies will opt for new investments, then re-indebtedness will start slowly, ”he said. -he declares.
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