Around 30 Cos Cut Their Borrowings, While Some Reduced Them To Zero In FY09
IFB Industries, Eicher Motors, Tata Sponge Iron, Balmer Lawrie & Co, and Hind Copper are among 30 companies that are leading Indian corporates in attaining the status of a zero-debt company, which fetches higher valuations in stock markets. The slashing of debt helps them to save on interest cost which eats into net profit and also leaves more cash to be distributed to shareholders in the form of dividends. It will also insulate the companies from any future hike in interest rates that looks inevitable, given the rising prices.
After studying the balance sheets of many companies across sectors, ET shortlisted about two-and-ahalf dozen companies which have brought down total borrowings, including secured and unsecured loans, to significantly low levels or even reduced them to zero in the last financial year.
According to analysts, more and more companies will try to get rid of debt as market conditions turn conducive for raising funds from other relatively cheaper sources. Funds from alternative sources can be used to repay existing loans and to reduce interest outgo.
“If a company pays off its loans, that could be because the company is confident of generating enough cash internally and does not need to raise debt for future growth,” said Maulik Patel, head of research, KR Choksey Shares and Securities.
The market tends to favour stocks of such companies even in bad conditions. Highlighting the disadvantages of being a debt-heavy company, he said investors are cautious about them because of concerns over impact of large interest outgo on bottomline. Citing examples of companies like Tata Motors and Wockhardt, Mr Patel said mounting debt puts pressure on valuations.
While reducing debt is a positive move, a company should also see that it is done without diluting equity significantly. If any company raises funds through equity issues like preferential allotment or QIP to retire debt, it would help reduce the debt-equity ratio. However, such moves would raise the equity capital and bring down earnings per share or EPS. “To avoid dilution in the equity, the company can instead tap the foreign market to raise debt like FCCB or FCCN where the cost of borrowing is much lower than the funds raised in local market through issue of debentures and in the form of loan from banks and financial institutions,” said an analyst with a leading Mumbai-based brokerage on condition of anonymity.
Of the shortlisted companies, BOC India has become a zero-debt company after the industrial gases major repaid the entire loan of Rs 219 crore in 2008. The company had raised Rs 597 crore through preferential allotment to the foreign parent BOC Group, part of which was utilised for retiring the debt.
State-owned Hindustan Copper, which is currently on the government’s list of possible candidates for disinvestment, is another example where the company has met its debt obligations from internal accruals. The company, which had a debt of Rs 216 crore, in 2006-07, was able to pare the outstanding to Rs 36 crore in the subsequent two years amidst the bull run in commodities.
“The years 2006 and 2007 were the best periods, with copper prices ruling at all-time highs,” said one senior executive with Hindustan Copper, who asked not to be named. “This is also the time when we reduced our debt by about Rs 300 crore.”
Tata Sponge Iron, IFB Inds and Eicher Motors are some of the other companies which are reducing debt to almost nil. The figures stood at Rs 0.1 crore, Rs 0.5 crore and Rs 8 crore respectively as on March 31, 2009, compared to Rs 147 crore, Rs 398 crore and Rs 218 crore as on March 31, 2007. Most of the abovementioned companies have recorded a sharp improvement in their performance. BOC India, Tata Sponge Iron and IFB Industries have recorded a net profit growth between 26% and 744% in FY09.
Vijay Gurav & MV Ramsurya MUMBAI, vijay.gurav@timesgroup.com
