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.
FOR many, Section 80C of the Income Tax Act forms the cornerstone of their tax saving strategy. The section incorporates tax breaks for so many varied activities that our lawmakers wish to encourage that it has a different connotation for different age groups or different income levels. The tax breaks for long-term investments range from zero risk investments like PPF to risky options like equity-linked savings scheme (ELSS). The section encourages spending for insurance protection and it also provides relief for those spending on their dependents. Therefore, there is no ‘one-size-fitsall’ formula for this Section. The only way to go about planning taxes is to define your age and income group and choose the appropriate options.
AGE: 25 YEARS
Gross taxable income: Rs 3,00,000
If an individual, who earns a taxable annual income of Rs 3 lakh with the mandatory provident fund deduction of Rs 20,000 per year, does not take any tax-saving measures except paying a life insurance premium of Rs 10,000, he might have to shell out Rs 12,360 in taxes. But, if he invests Rs 1 lakh under section 80C and buys a health cover, entailing a premium of Rs 10,000, he can bring down his tax payable to Rs 4,120. In the case of women, the tax liability will be merely Rs 1,030, since the threshold exemption limit for women is Rs 1,80,000. This apart, if she is repaying an education loan, the tax liability might be nil as the entire interest amount paid on the loan is exempt under section 80E. Also, if the individual does not have any dependents, it would be prudent to reconsider the need for life insurance. While many financial planners recommend ELSS for people in this age group, others contend that even public provident fund (PPF) is an attractive avenue. “Our recommendation for this category is that they should invest 50% in ELSS and 50% in PPF,” said financial planner Amar Pandit.
AGE: 30 YEARS
Gross taxable income: Rs 5,00,000
If an individual’s taxable income is around Rs 5 lakh per annum, he will fall in the next bracket — the one attracting a tax rate of 20% (Assumptions: PF contribution of Rs 36,000 and life insurance premium of Rs 10,000). However, proper tax planning could result in considerable savings. Against paying a tax of Rs 47,174 before investing in instruments under 80C and paying a health insurance premium of Rs 15,000, he will end up paying just Rs 32,960. Since most individuals may not have to shoulder any major responsibilities at this age, again, a combination of ELSS and PPF could be a good bet. “A point to be borne in mind here is that all investment decisions need to be taken after evaluating individual needs and risk profile, and not merely on the basis of age and income level,” pointed out financial planner Kartik Jhaveri.
AGE: 35 YEARS
Gross taxable income: Rs 7,00,000
Here, if an individual (married with kids) has availed of a home loan this year, the opportunities for maximising the tax breaks are immense. If he is servicing a home loan of Rs 40 lakh, he can claim deductions on interest and principal repaid. In fact, the amount of principal repaid itself will help in exhausting the entire Rs 1 lakh limit. Besides, the deduction of Rs 1,50,000 for interest paid on home loan will lower his tax liability further. The combined impact of all deductions will be huge: from paying a tax of Rs 96,820 — prior to availing of these exemptions, the tax payable will come down to Rs 43,260. In case he has not opted for a home loan, he can claim deductions under section 80C for tuition fee paid for his children’s education.
AGE: 40 YEARS
Gross taxable income: Rs 10,00,000
At these income levels, the tax-saving options are almost similar to the Rs 7,00,000 bracket. A home loan repayment would circumvent the need for making any investments under section 80C. Exemptions claimed under various sections (80C, 80D and 24) would result in the tax payable decreasing from Rs 1,83,340 to Rs 1,29,265. If the individual has started making contribution to PPF since the age 25, the mandatory 15-year lock-in tenure would have come to an end. Under these circumstances, if he is not repaying his home loan and consequently, is scouting for avenues to invest under section 80C, he can consider extending the PPF tenure for another five years. For senior citizens, the income up to Rs 2,25,000 per annum is exempt from tax. For this category of assessees, experts recommend avoiding instruments entailing a prolonged lock-in period. However, the 9% senior citizens scheme and post office time deposits (investments under which are deductible under section 80C) are recommended.