Lessons from extending more credit to MSMEs, in the charts


When the pandemic threw up early challenges, India Inc. went into balance sheet repair mode, bouncing on low interest rates and excess liquidity. The debt repayment spree helped reduce combined gross debt by 12% in 2020-21, shows a Mint analysis of a sample of major listed Indian companies. However, borrowing rose again by 31% in the year ending March 31, according to the latest data.

Analysts attribute the increased leverage to the improving business environment as India’s manufacturing sector began to rebound from the second wave of covid-19. The analysis covers 184 non-banking and non-financial NSE 500 companies whose financial results for 2021-22 are available to date.

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“Certain segments are starting to see a strong rebound in capital spending,” said Sharad Verma, managing director and senior partner at BCG. “In a low interest rate regime, this rebound in investment could be part of the reason these companies are increasing their debt levels to finance some of the capital expenditures.”

Rising commodity inflation is also likely to have boosted companies’ working capital requirements.

The debt-to-equity ratio (DE), another indicator of leverage, also increased in FY22 in certain sectors such as energy, metals and mining, automotive and pharmaceuticals. The electricity sector saw the largest increase in DE ratio from 0.89 to 1.11 times. For the automotive sector, it went from 0.19 to 0.21. The reasons may vary: for example, the power sector has seen increased investment, while automotive has faced higher working capital needs, said Rajani Sinha, chief economist at CareEdge.

Restrictive expansion

Acute trade uncertainty and weak demand, both domestic and external, kept India Inc. at a low level of animal liquors even before the pandemic. Long after the 2008 financial crisis, global investment remained low and companies made diligent efforts to build capacity. However, lately, several sectors have seen some recovery due to low interest costs and a commodity boom. Net fixed assets, a proxy for investment, increased by 39% in FY22 for metal companies after contracting the previous year. Chemicals and durable consumer goods grew by 22% and 20% respectively. The impact will gradually spread across all sectors as capital expenditures will take some time to materialize.

But will interest rate hikes discourage the recovery? “While interest rates are rising from current very low levels, they will still remain low (compared to previous levels) for some time,” Sinha said. “Furthermore, investment decisions will not only depend on interest rates, but also on factors such as demand, supply and capacity utilization.”

Better credit profiles

In an effort to deleverage balance sheets, companies’ ability to service debt has only improved thanks to healthy operating profits. The sample’s combined interest coverage ratio (ICR) fell from 6.4 in FY21 to 9.2 and from 5.8 in FY20. increased by almost 31%, while the average cost of borrowing fell by 318 basis points. This has given a big boost to corporate credit profiles, with 91% of companies reporting an ICR above 1.5, up from 89% previously. Below a ratio of 1.5, companies’ ability to meet interest charges becomes questionable.

Experts remain confident in India Inc.’s ability to service debt and expect it to remain at similar levels in the future. However, some headwinds are arising due to commodity inflation, as the burden has only been partially passed on to end consumers, putting pressure on margins. Even if margins don’t improve over a period, companies have enough operating profits to cover their interest expenses, experts say.

healthy reserves

Throughout this time, companies have also been building up a war chest for future shocks. Amid the pandemic, corporate cash hoarding jumped 32% in FY21 and 19% in FY22. “Most companies’ balance sheets are much stronger than five years ago and many are sitting on quite large excess reserves,” Verma said. A good number of them have high cash-to-market capitalization ratios, and the uncertainties should only make them hang on. on cash for a little longer.


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“Companies will continue to be cautious about this and how they allocate this capital is the key decision they are considering,” Verma said. Going further, he expects some impact from interest rates, but still finds many macro indicators very supportive.

(This is the final part of a three-part series on Indian business recovery from the pandemic and the way forward. first part covered the stock market performance of companies and the second part covered earnings data.)

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