In­dia Inc’s hopes can sink un­der pile of debt

The Pak Banker - - BUSINESS -

China's bor­row­ing spree grabs head­lines, but In­dia's cur­rent cor­po­rate earn­ings sea­son is also prov­ing to be all about debt. More pre­cisely, it's prov­ing to be about the folly of in­vestors' ar­dent hope that some­how com­pa­nies and banks will out­grow their li­a­bil­i­ties even in a slow econ­omy.

As two re­sults on Jan­uary 28 un­der­scored, rather than get­ting on top of the prob­lem, In­dia Inc is sink­ing deeper un­der the weight of lev­er­age. The first of those an­nounce­ments came from ICICI Bank. In­dia's largest non­state-con­trolled len­der re­ported al­most a full per­cent­age point jump in its bad loans from the Septem­ber quar­ter to 4.72 per cent. Ag­gres­sive loan-loss pro­vi­sions saw net profit growth slow to a six-year low.

The dif­fer­ence with ri­val HDFC Bank, whose gross non­per­form­ing loans are much bet­ter con­tained at 0.97 per cent of to­tal ad­vances, couldn't be starker. HDFC gets 52 per cent of its rev­enue from retail cus­tomers, com­pared with less than 24 per cent for ICICI. With com­pa­nies in the in­fra­struc­ture and me­tals busi­nesses strug­gling to mend their tat­tered bal­ancesheets, the pall of gloom that hangs over ma­jor cor­po­rate lenders is un­likely to lift. That's of par­tic­u­lar con­cern to in­vestors in In­dia's state-run banks, which con­trol the bulk of the econ­omy's fi­nan­cial as­sets.

A Gold­man Sachs ex­change-traded fund that seeks to repli­cate re­turns from th­ese lenders has lost 46 per cent over the past year. The other shock came from Bharti Air­tel, In­dia's largest wire­less ser­vice provider. It an­nounced a 22 per cent slump in net profit from a year ear­lier. In just three months, net debt jumped by more than $1 bil­lion (Dh3.67 bil­lion) to al­most $12 bil­lion.

Bharti has spent 98 per cent more on cap­i­tal ex­pen­di­ture over the past four quar­ters than it did in the 2014 fi­nan­cial year. This is wor­ry­ing on two counts. One, the im­pend­ing en­try of bil­lion­aire Mukesh Am­bani's fourth­gen­er­a­tion ser­vice is bound to force in­cum­bents like Bharti to keep spend­ing in or­der to stand any chance of com­pet­ing against Re­liance Jio for a share of the coun­try's grow­ing data busi­ness. That could put fur­ther pres­sure on cor­po­rate bal­ance-sheets.

At the same time, In­dia's tele­com reg­u­la­tor is plan­ning an ex­pen­sive sale of spec­trum. If the cash- strapped In­dian govern­ment de­cides to go ahead with an auc­tion, mo­bile oper­a­tors will be caught in a pris­on­ers' dilemma. While they'd be do­ing their in­vestors a favour by sit­ting out the sale, if even one of them de­cides to bid, the oth­ers will be at a dis­ad­van­tage. And, of course, who­ever does win the spec­trum will be sad­dled with more debt.

In­dia's cor­po­rate lev­er­age prob­lem doesn't get nearly as much at­ten­tion as China's. That's partly be­cause the debtto-equity ra­tio for the top 500 pub­licly traded In­dian stocks is 126 per cent, ver­sus 211 per cent for com­pa­nies on the CSI 300 In­dex. How­ever, when it comes to com­pa­nies' abil­ity to ser­vice that debt, In­dian cor­po­rates - in the ag­gre­gate - may be worse off:

By the time In­dia's re­port­ing sea­son ends, an­a­lysts will prob­a­bly have marked down their es­ti­mate of al­most 17 per cent growth in per-share earn­ings for the bench­mark Nifty In­dex over the next 12 months. It will be more wor­ri­some, though, if they fur­ther slash their cash flow fore­casts, which are cur­rently sig­nalling a 2.4 per cent de­cline. ICICI and Bharti Air­tel's re­sults have shown the fault line. With debt trou­bles in­ten­si­fy­ing, less cash from op­er­a­tions will make In­dia Inc's al­ready stretched bal­ance-sheets groan even louder.

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