Small firms fuel India’s 2-speed economy
As smaller companies borrow more and expand, they are likely to create more jobs
India’s smaller companies, which are driving the nation’s world-beating economic expansion as state enterprises clean up bad debt, are set to cash in on their improving credit ratings.
There were 3.2 times more upgrades than downgrades among firms with revenue between $20 million (Dh73.50 million) and $100 million (Dh367 million) in 2015, the best ratio in almost five years, Pawan Agrawal, chief analytical officer at Crisil Ratings, said in a presentation in Singapore on December 8.
Mid-caps have issued Rs115.3 billion (Dh6.2 billion or $1.7 billion) of local bonds in 2015, set for the best year since 2011, and the average coupon dropped to 7.4 per cent from 7.9 per cent in 2014.
India’s economy grew faster than expected in the JulySeptember period as mid-caps benefited from the policies of Prime Minister Narendra Modi, who created a federal ministry for entrepreneurship and made it easier for small business to access bank capital. By contrast, state-owned giants and other large companies struggle with shrinking exports and sluggish lending.
“The mid-sized companies are in a sweet spot,” said Agrawal. “They have used cash to reduce leverage. That’s the segment doing best in credit quality.”
Economic Boost
As the smaller companies borrow more and expand, they are likely to create more jobs, according to Dharmakirti Joshi, Crisil’s chief economist. “It’s central for employment” because smaller companies “are more labour intensive,” he added.
Can Fin Homes Ltd, a Bengaluru-based provider of home loans, issued Rs1 billion of 2019 notes with a 8.45 per cent coupon last month, according to data compiled by Bloomberg. That was down from the 10.05 per cent the firm paid on three-year securities it sold in 2014, the data show. L&T Metro Rail Hyderabad Ltd. raised Rs2.5 billion by issuing 2035 securities with a 9.81 per cent coupon in November, Bloomberg-compiled data show.
The median listed mid-cap had debt equivalent to 79.8 per cent of equity, better than 87.6 per cent for larger companies, Bloomberg data showed.
The median debt to assets ratio of listed the smaller firms was 31.6 per cent in their latest filings, lower than the 32.3 of larger corporations, the data show.
The improving financial health among smaller enterprises is a boon for banks grappling with stressed assets that have soared to 11.1 per cent of advances and are rising faster than the pace of lending.
While borrowing costs for the mid-caps have dropped in the bond market, banks still haven’t fully reflected their improved credit quality in loan rates, according to Rakesh Valecha, an analyst at India Ratings in Mumbai.
The firms would pay closer to 12 per cent to borrow from banks, Valecha said. For that reason, mid-caps will likely drive issuance in the local note market in the next six to nine months, he said.
Many of the larger firms are unable to increase investment and generate jobs as well as contribute more to economic expansion because they have too much debt, according to Valecha.
“There’s an improvement in consumer demand and the benefits are more visible for smaller companies,” Valecha said. “For some of the larger companies it’s leverage that’s standing in the way of turning around. Even some of those doing well are not investing because of that.”