Debt servicing ratios for Indian corporates have deteriorated year-on-year and are likely to worsen further given that capitalised interest for most of these companies has surged.
Capitalised interest is 30%-250% higher, resulting in the deterioration in debt servicing ratios for many of the firms, according to Credit Suisse in a report released on August 19.
In fact, aggregate interest cover for the top 10 companies covered by Credit Suisse has dropped from 1.6 times to 1.4 times. Interest cover ratios at groups such as Essar, a Mumbai-based corporate with investments in the sectors of steel, energy, infrastructure and services; Bangalore-based infrastructure company GMR; GVK, a Hyderabad-based Indian conglomerate and Lanco, another conglomerate are already under one.
Interest coverage ratio is used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the corporate is burdened by debt expense.
“The interest cover calculations only take into account the interest costs being currently expensed on the P&L [profit and loss],” said Ashish Gupta, research analyst at Credit Suisse. “As most of these groups have capacities under construction, a large share of interest expense is also currently capitalised.”
“With capitalised interest currently 30%- 250% higher than the P&L expense, the interest burden may also sharply rise as projects come on stream,” he added.
For example, Reliance Power has a P&L interest of INR5.8 billion (US$92 million), whereas its capitalised interest is INR14.7 billion, which would bring down the interest cover from 2.4 times to 0.7 times at the current profit levels, notes Credit Suisse.
To make matters worse, currency depreciation is adding to these corporates’ debt burden. This is because many company loans obligations are 40%-70% denominated in a foreign currency.
Adani Enterprise, an Ahmedabad-based infrastructure company and Reliance Communications, a Mumbai-based telecommunications corporate, have the largest percentage of borrowings through foreign exchange (FX) loans, say Credit Suisse.
“With the 6.7% currency depreciation in the 2013 financial year corporates such as Reliance Communications, Adani Enterprise and JP Associates have seen a FX hit equivalent to their financial year 2013 profit-after-tax,” said Gupta. “With the Indian rupee down 12% since March 13, the liabilities on account of this must have increased further.”
The financial year for Indian corporates ends March 31.
These corporate issues have become more problematic in recent months as India is in danger of a full-blown economic crisis. There have been mounting fears about Asia's third largest economy, which is struggling with a gaping current account deficit that has helped push the rupee to record lows.
As a result of the rise in debt burden, some corporate projects are already undergoing restructuring.
Lanco Infratech has already begun talks with banks for the restructuring of INR75 billion of debt in the standalone business, without including the acquisition of Australia-based Griffin Coal Mining in 2011. Banks have also restructured part of the debt for Reliance Power’s 3,960 megawatts Sasan Ultra Mega Power Projects (UMPP).
Debt repayment commitments are also higher in the 2014 financial year. For corporates with annual reports already published, there has been a sharp 30%-150% rise in debt repayment liabilities. This includes companies such as Adani Enterprises, GMR Infrastructure and JP Power, notes Credit Suisse.
“With debt repayments for most of the companies three to five times their 2013 financial year annual profits, and free cash flow for most groups are still negative, banks will likely need to refinance or restructure most of these loans,” said Gupta. “Many of the groups also have [foreign currency-denominated bonds] maturing in the 2014 financial year.”
Despite all these ongoing concerns, large corporate non-performing loans (NPLs) are still low compared to rising delinquencies seen in small-to-medium-sized enterprises and mid-corporates.
However, the overleverage in the large corporate segment is high and is a potential source of additional asset quality stress for banks. For example, aggregate debt levels have increased by a further 15% in 2013 financial year. Among the largest increases have been at GVK and Lanco where the gross debt levels are up another 24%, notes Credit Suisse.
While several groups have been looking to deleverage, only a couple of asset sales were successfully concluded over the past year, adds the bank.
But even after an asset sale, GMR Infrastructure’s debt levels have increased by 13% from INR360 billion to INR408 billion. While Adani Ports has sold Abbott Point asset to the promoters, it still has an outstanding corporate guarantee for US$800 million, as a result of which its liability hasn’t reduced substantially.
The top 10 companies that Credit Suisse covers include Adani Group, Essar Group, GMR Group, GVK Group, Jaypee Group, JSW Group, Lanco Group, Reliance ADA Group, Vedanta Group and Videocon Group.