Crisis Zone

Albert Einstein once said, "We cannot solve our problems with the same thinking we used when we created them." Businesses in their aggression to grow wealth or in their failure to understand the storm that chases them, usually end up leveraging the entity. In recent times, companies that leveraged beyond their repayment ability had to undergo insolvency proceedings and some billionaire promoters returned home with empty pockets.

The BT500 rankings shows that despite past lessons, corporate debt is still on the rise. The total debt of India Inc.'s 15 most-indebted non-BFSI companies (excluding Reliance Industries, which turned net debt free in the September quarter using investments received in digital and retail businesses) increased by 15 per cent to Rs 10 lakh crore in 2019/20, from Rs 877,441 crore in 2018/19. Interest outgo jumped 28.8 per cent to Rs 74,065 crore from Rs 57,506 crore. However, there is improvement in companies' cash and bank balance, which increased by 32.4 per cent to Rs 41,841 crore from Rs 31,603 crore.

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Half of the 15 most-indebted companies are state-owned enterprises. This includes the likes of Bharat Petroleum and Hindustan Petroleum, which the government is looking to privatise. These companies cover a wide spectrum of industries - there are four steel companies, three each from power and oil sectors, two each from telecom and infrastructure, and one carmaker. Four of the 15 companies have a negative interest coverage ratio (ICR) as opposed to just one last year. ICR measures the number of times a company can cover its interest payment with available earnings..

Towering Troubles

Vodafone Idea which was the only company last year with a negative ICR now has company in Bharti Airtel, Tata Motors and Vedanta. Vodafone, the third-largest telecom operator, registered the highest-ever loss by any Indian company in a financial year - Rs 73,878 crore in 2019/20 - after provisioning for over Rs 50,000 crore as statutory AGR dues as mandated by the Supreme Court. The apex court ordered that non-telecom revenues be included in the calculation of statutory dues, forcing the management to acknowledge that the liability has "cast significant doubt on the company's ability to continue as a going concern". The court has given firms 10 years to clear dues.

Vodafone, which was among the worst hit after the launch of Jio, merged with Idea Cellular in mid-2018 to form Vodafone Idea. The merger, however, did not result in any improvement in its share price and market valuation never looked up. The value of the share fell to a record low of Rs 2.40 in November 2019. Vodafone Idea's market cap stood at Rs 24,300 crore as on November 5, while Bharti Airtel was at Rs 2.5 lakh crore. Bharti Airtel too had posted a loss of Rs 32,183 crore in 2019/20 due to provisioning of AGR dues worth Rs 25,976 crore (after paying Rs 18,000 crore). In comparison, Reliance subsidiary Jio Platforms (JPL) raised private equity capital at a valuation of Rs 4.9 lakh crore.

Tata Motors and Vedanta are the other companies with negative ICR due to losses at the consolidated level. Tata Motors closed 2019/20 with a consolidated net loss of Rs 12,070.85 crore, compared to a net loss of Rs 28,826.23 crore in the previous fiscal.

The automobile sector has been going through tough times. "In India, demand which was already adversely impacted by the general economic slowdown, was further affected by the lockdown," Tata Motors said in the FY20 results statement. The carmaker has lined up an exciting product range while driving a robust cost and cash-savings agenda. Actions are underway to deleverage Tata Motors, with Jaguar Land Rover set to become sustainably cash positive from 2021/22.

Anil Agarwal-led Vedanta reported a net loss of Rs 4,743 crore in 2019/20, compared to a net profit of Rs 9,698 crore in the previous year. The company wrote off Rs 17,132 crore on impairment of assets in oil and gas, copper and iron ore businesses in the fourth quarter, leading to losses in the full financial year. Besides, plans to delist Vedanta also failed, since the premium over the floor price demanded by shareholders was unaffordable for promoters. State-run Life Insurance Corp (LIC), which holds 6.37 per cent stake in Vedanta, submitted all its shares at Rs 320 a piece, a 267 per cent premium over the floor price of Rs 87.25.

The legacy acquisition of Corus Plc in 2007 is still a lingering issue for Tata Steel. It closed 2019/20 with a consolidated net profit of Rs 2,720 crore, 73.55 per cent decline year-on-year. According to latest reports, Swedish steelmaker SSAB AB is in talks with Tata Steel to merge their businesses in Europe. JSW Steel also has high debt, but is executing cost cuts and debt-reduction plans. The company plans to bring down the debt to EBITDA ratio to 3.75 times by March 2021, from the current 4.73 times, says Seshagiri Rao, Joint MD and Group CFO. JSW Steel is the majority investor in the acquisition of Bhushan Power and Steel and Asian Colour Coated. "We will not consolidate them with the flagship company. For instance, JSW Steel will spend for the equity portion of the acquisition of Bhushan. The debt will be raised on the books of Bhushan for the acquisition and it will have to make the repayments from its cash flow," he says.

Infrastructure behemoth Larsen & Toubro (L&T) has been planning to become asset-light for a long time. CEO and MD S.N. Subrahmanyan recently said the company will reduce its Rs 1.24-lakh-crore debt by Rs 30,000 crore before March 2021 by selling its entire stake in L&T Infrastructure Development Projects and Nabha Power, and transferring its stake in Hyderabad Metro to an infrastructure investment trust. Adani group's flagship company, Adani Ports and SEZ, is the other most indebted company.

In the past, many of the high debtors in the list included Reliance Communications, Bhushan Steel, Essar Steel, Videocon, Lanco Infra and Jaiprakash Associates. All had filed for bankruptcy. Some of them were sold to new promoters and others went for liquidation.

With the government suspending the Insolvency and Bankruptcy Code (IBC) for a year since March, highly leveraged companies will get a chance to restructure their loan books. But they will have to tighten their belts and focus on costs, and create markets and new products range.

@nevinji