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BW Businessworld

Up, Up, It Goes

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Corporate India continues to reel under the impact of a constellation of domestic and global factors which have pinned down even the best and the mightiest in Indian business. A large number of companies had borrowed heavily to fund their investment plans in anticipation of an imminent uptick in the global economy, which had gone into recession following the US banking bust of 2007-08. The world economy has bounced back within 24 months of every recession since 1945. But even 45 months later, there is no sign of a recovery yet.

These companies have been stuck with massive debts as funds have either become more expensive or their sources have dried up since then. The crushing impact of this on corporate India was evident during fiscal 2011-12. Early bird results of 912 companies as on July 9, based on their audited and unaudited results, show an alarming 40.99 per cent rise in interest payouts in FY 2011-12 over the previous year. The rise during the two previous fiscal years was just 13.18 per cent and 3.55 per cent, respectively. As a result, the combined net margin of these companies had slipped from 9.13 per cent in 2010-11 to 7.22 per cent in 2011-12.

Interestingly, though no one can be blamed for this phenomenon, corporates and industry bodies have not stopped pointing their fingers at the Reserve Bank of India's hawkish stance towards inflation. In its efforts to curb inflation, the RBI effected 13 successive repo rate (the rate at which banks borrow from the RBI) hikes, which increased the repo rate by 3.75 per cent in 19 months until October 2011. For mid-rung companies, the borrowing rates went as high as 13.5 per cent as a result.

True, raising fresh domestic debt had become an unviable proposition for companies, but what prevented them from going for loan swaps, which are always used as an interim measure to move expensive loans to lower interest loans? As it turns out, that was really never an option in the past two years. "Overall, interest rates were still rising. Swapping would have only increased the interest burden," says Ajit Ranade, chief economist, Aditya Birla group.

At the same time, the government's inability to pull through the next round of economic reforms was noticed by international markets, which made it impossible to raise debt abroad. "Raising funds abroad is difficult these days. It's difficult to convince global investors to invest in India," says Jagannadham Thunuguntla, head of research at SMC Global, an equity research firm. "All over, and especially in the US, balance sheets are awash with liquidity. But due to anxiety, lending has not increased. There is risk aversion. Banks are not confident of growth prospects," adds Ranade.

What added to the woes was the flight of capital by foreign institutional investors. That caused the rupee to depreciate from 44 a dollar to 56 in months. That killed even the remotest chance of raising debt abroad, courtesy higher servicing costs. "On a fully-leveraged basis, the cost of foreign borrowing is not lower if you account for the country premium, the company premium as well as the hedging cost," says Ranade.

Elusive Equity
Equity could have been a cheaper source of funding because, unlike debt, it entails no fixed outgo towards servicing it. But stock markets, in India, as well as in the US and Europe, remained depressed as economic cues continued to remain weak. As a result, raising equity became rare, from public as well as private investors such as large private equity firms. "Since the equity route is not available, the only source of funding is debt," says Thunuguntla. "Equity fundraising has to return to retire debt."

SIGNS: A part of 2011-12 was at the cusp of the coming slowdown in 2012-13. The 210 firms that have reported audited results for FY2012 play out this story. Their top line jumped 28.07 per cent, while the bottomline fell 1.52 per cent. To keep pace with growth, these firms borrowed heavily.
Particularly because raising resources via equity was not possible. This led to their debt growing 21.4 per cent to Rs 10.93 lakh crore. Borrowing nearly Rs 2 lakh crore at high rates has pushed their interest payout 43.6 per cent.

All these factors have left companies badly bruised. India's largest company, the government-owned Indian Oil Corporation (IOC), which is already burdened with huge under-recoveries on account of the oil subsidy, reported the highest interest payout of Rs 5,895 crore (nearly $1.1 billion at current conversion rates) among 913 companies.

Its interest payout grew 95.4 per cent in fiscal 2011-12. Petroleum minister S. Jaipal Reddy explained that as a result of reduced cash flows due to under-recoveries, IOC had been forced to raise funds for expansion and modernisation. Last October, the company's board had given its approval for raising its borrowing limit by Rs 30,000 crore to Rs 110,000 crore.

Among companies that have reported the fastest growth in interest payouts in FY 2011-12, real estate company Puravankara Projects figures right at the top. Its interest payout grew 4,608 per cent to Rs 192.8 crore, while its net profit was barely Rs 129.3 crore on revenues of Rs 810 crore.

For the moment, it seems there is no respite from the interest menace. "It is going to be a tough year. Declining crude prices could have brought down fiscal deficit and inflation. But (poor) monsoon and global woes have offset those calculations," says Ranade.

Clearly, there is very little that companies can do but to grin and bear it.


(This story was published in Businessworld Issue Dated 23-07-2012)