A third of India’s top firms face severe debt crisis

Many of these firms now find themselves in a spiral of declining profitability, shrinking market capitalisation and rising liabilities. This raises a question mark over their financial viability. On this parameter, nearly a third of India’s top companies are either financially insolvent or on the verge of it. They can’t use equity markets to raise enough capital to fund these projects or lighten their debt burden. Of the 406 firms in the BSE-500 list (excluding banking and financial ones) that have declared their results so far, the market capitalisation of 143 is either below their debt or just a notch above. The sample includes companies with average market capitalisation (during July this year) of less than 1.5 times their net debt as at the end of 2012-13.

According to figures from Capitaline, at the end of March this year, these companies were sitting on a debt of Rs 13.2 lakh crore — nearly twice their average market capitalisation in July. Two years ago, however, it was the other way around. In July 2011, their market value was 40 per cent higher than their net debt. Over the past two years, their debt (adjusted for cash and other liquid investments on their books) has risen 61 per cent, while their market capitalisation has declined 40 per cent. This has shut for these companies the equity window for project funding or debt repayment.

The list includes companies like Tata Steel, Hindalco Industries, Tata Power, L&T, Jaypee Associates, Adani Power, GMR Infra, GVK Power, JSW Steel, Reliance Infra, IndianOil, HPCL, Shri Renuka Sugars, Bajaj Hindusthan and Suzlon. Their marketcap- to-debt-coverage ratio will look even worse if deferred tax liability and contingent liabilities are included. Most of these firms also have high debt-to-equity ratio (greater than 1.0), poor interest coverage ratio (less than 2.0) and falling profitability.