Debt held by stressed firms hits record high in India

Fears that Reliance Communications Ltd may have defaulted on bond payments seem to have sunk the firm's dollar bonds.

But the company is not alone in facing troubles relating to repayment of debt. The proportion of debt held by Indian companies unable to meet their interest obligations has risen to its highest level since the global financial crisis of 2008, a Mint analysis shows.

The analysis is based on balance-sheet data of 316 nonfinancial BSE 500 companies for the fiscal year ended March 2017, sourced from corporate database Capitaline, and from company annual reports.

These 316 firms are those for which consistent data is available for the past 10 years. The BSE 500 index accounts for 93.5% of market capitalisation on the bourse.

Of the aggregate debt held by firms belonging to the BSE 500 universe, more than a third is held by firms whose interest coverage ratio (ICR) has sunk below one. The ICR measures how many times over a company could pay its current interest payment with its available earnings, and an ICR less than one indicates inability to service interest liabilities with current earnings.

The number of firms with below-1 ICR in the BSE-500 universe under consideration has declined marginally from 62 in fiscal 2016 to 53 in the past fiscal.

But this does not mean much, given that similar declines have been witnessed in the past, only to be reversed in subsequent years.

For instance, the number of firms with below-1 ICR had fallen from 66 in fiscal 2013 to 53 in fiscal 2014, only to rise again to 65 in the next fiscal.

What is more important is that profitability ratios of stressed firms show no sign of improvement yet. The return on capital employed (RoCE) of firms unable to meet interest payments has declined marginally over the past fiscal. RoCE measures the ability of firms to generate profits using a given level of capital.

The analysis shows that the overall leverage level or the aggregate debt-equity ratio has improved marginally over the past fiscal. But this figure hides the stark contrast in the leverage ratios of stressed and healthy firms, as the charts below illustrate.

The worst-hit sectors appear to be telecom and realty. The realty sector had an interest coverage ratio of 0.98 in fiscal 2017.

It was even lower at 0.76 for the telecom sector. Other sectors with high leverage and low profitability are industrials (including capital goods and infra companies) and utilities (including power firms).

A size-wise comparison of leverage shows that most debt is concentrated among the least valuable firms in the BSE-500 universe.