80% of indebted firms set up in reforms era

Companies that went on an expansion spree after economic reforms are paying a stiff price for their ambition. Most of corporate India’s heavily indebted firms were incorporated after 1980 and their growth plans were taken up in the 1990s, the era of economic reforms in the country.

Companies that went on an expansion spree after economic reforms are paying a stiff price for their ambition. Most of the corporate India’s heavily indebted firms were incorporated after 1980 and their growth plans were taken up in the 1990s, the era of economic reforms in the country.

Of the 67 top listed companies not able to service interest on their debt during 2016-17 due to inadequate profits, 53 started operations in the post-1980 period when private investment in many sectors was first liberalised.

Some of the post-1980 companies facing headwinds include Jaiprakash Associates (incorporated in 1995), Alok Industries (1986), Bhushan Steel (1983), Amtek Auto (1988) and Videocon Industries (1986). The promoters of these companies stand to lose a significant chunk of their businesses as bankers plan to auction their assets to recover dues.

In contrast, only 14 companies incorporated before 1980 were unable to meet their financial obligations with Ballarpur Industries (1945), Hindustan Construction (1926), Unitech (1971), Binani Industries (1962) and McNally Bharat (1961) being some examples.

The analysis is based on a common sample of 633 non-financial companies that are part of the BSE 500, BSE MidCap or BSE SmallCap indices. The sample does not include software exporters such as Tata Consultancy Services, Infosys, Wipro and HCL Technologies because these companies do not require much capital, unlike other industries.

In the past, many of these indebted companies were among the fastest growing members of corporate India, accounting for the bulk of the new projects during the boom years. For example, the post-1980 companies accounted for half of the entire capital expenditure by corporate India between 2004-05, the first year of the boom, and 2013-14, with just 22.6 per cent of revenue share in 2004- 05. Life has now come a full circle and younger companies reported declines in their balance sheets (read assets) in 2016-17 even as older companies continue to grow, though at a slower pace.

In all, the 413 companies set up after 1980 in the Business Standard sample were sitting on a total gross debt worth ~11.2 trillion at the end of March 2017, up from ~0.82 trillion at the end of March 2004.

These younger companies accounted for 51.3 per cent of all corporate debt at the end of the last financial year, up from 41.5 per cent in 2004-05.

Analysts attribute this to the growth ambition of these companies besides the post-2012 economic slowdown that led to a sharp fall in demand across industries. “In most of the stressed sectors, younger companies are largely in the pre-revenue stage -- they have a large amount of capital stuck in ongoing projects with little revenue and profit. In contrast, older companies control the bulk of the revenue and profit with few ongoing projects. This puts the latter at an advantageous position when an economic slowdown hits the finances of new players,” said Harish HV, partner, Grant Thornton.

The disconnect between revenue and capital shows up in the finances of the younger companies. At the end of 2016-17, the post-1980 companies accounted for half of the entire gross block of the top listed non-financial companies, much higher than their revenue (43.5 per cent) and profit (25 per cent) share in 2016-17. Lower revenue and profit have translated into greater indebtedness, with a typical post-1980 company having 70 per cent more debt, adjusted for equity, on its books compared to pre-1980 companies. A typical post-1980 company reported a gross debt-equity ratio of 1.7x on average in 2016-17 against 1.0x for a pre-1980 company.

The difficulties of the younger companies have opened growth opportunities for older companies with deep pockets. “Older companies, which lost market share to newer players in the last two decades, now have the opportunity to consolidate by acquiring assets of these financially struggling companies,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

The consolidation is most apparent in sectors such as steel, power and cement, where lenders plan to auction stressed assets to recover their dues. This has raised fears of a decline in competition in many sectors and its long-term negative consequences. “Consolidation is good in the short term as it brings scale and lowers cost, but any decline in competition beyond a certain degree is bad for the economy in the long term,” Harish pointed out.