The great Indian debt detox: How companies are repairing financial health

Cash impact

Before unveiling India Inc’s loss of appetite for loans, a trip back to 2022-23 is in order. That year, the total debt of a Mint sample of 416 non-financial companies in the BSE 500 had shot up 9.3%, after rising about 2% in the previous fiscal. A significant portion of this spurt was due to companies looking to shore up their working capital in a year when their operating profits shrank.

Cut to 2023-24. With commodity prices cooling and inflation easing, the companies in our analysis saw a boost in operating cash flows, which improved their financial health. Their reliance on debt dropped, and as a result total borrowings rose less than 1%, marking the slowest growth in at least seven years.

Aditya Jaiswal, assistant vice president, equity strategy, Elara Capital, attributed the muted growth in debt to improved profitability that year. “It allows companies to rely more on their internal cash flows to fund operations and growth initiatives," he said.

The tepid growth in corporate loans was also visible in the declining share of industry in the overall credit given by banks. As of 31 March 2024, industry had a 22.2% share in outstanding credit, down from nearly 25% a year prior, Reserve Bank of India data showed.

Equities rule

Soumyajit Niyogi, director, core analytical group at India Ratings & Research, said the trend was driven by strong cash flows coupled with the buoyant equity markets.

Indeed, the debt-to-equity ratio—which shows whether a company's capital structure is tilted towards debt or equity financing—of more than half of the sectors tracked by Mint declined in 2023-24. A lower debt-to-equity ratio suggests that a firm relies more on equity than on debt.

Tapping alternative avenues has also helped companies keep borrowings in check. A recent SBI Capital Markets report on the banking sector noted that large industries, particularly those with private behemoths, have been favouring bond markets and global tie-ups to raise money, besides reducing their liabilities significantly.

Also read: Are Indian firms falling into another debt trap?

However, while most companies have become financially stronger, there has been fresh debt addition in some pockets. Four sectors—fast-moving consumer goods, chemicals, textiles, and agriculture—saw their aggregate debt grow 25% during the fiscal.

Kinjal Shah, senior vice president and co-group head, corporate ratings, at Icra Ltd said, “Some sectors such as gems and jewellery, construction, sugar, and chemicals saw increase in debt levels due to increase in working capital cycle, whereas oil and gas, auto equipment manufacturers, power, and iron and steel saw moderation due to robust cash generation."

Credit score

Lower debt paves the way for future financial security for companies. The interest coverage ratio is a useful metric to assess this. It’s the ratio between a company’s operating profit and interest payments. A higher ratio shows that a company can comfortably cover its interest payments with its operating profits.

Companies in the sample aced this metric by reaping the benefits of lower commodity prices and easing inflationary pressures, which boosted operating profits. The overall interest coverage ratio of the sample improved to 8.2 times in 2023-24 from 7.2 times in the preceding year. This marks a sharp improvement from 2020-21, when it stood at 6.4 times. 

“Improved debt-servicing capabilities can be attributed to better operating performance, cost management, and, in some cases, deleveraging efforts," Jaiswal said.

Also read: The pockets of stress in India Inc’s improving credit health

Only 20 or so companies in the sample of 416 had a critically low interest coverage ratio – 1.5 or lower. This level is considered a tipping point below which a company's ability to service its debt becomes a cause for concern. The number of such companies in this sample is its lowest in at least eight fiscal years for which the data was analysed. In 2020-21, as many as 49 companies were below this mark as the economy was hit by the covid pandemic.

“This improvement indicates that more companies are generating sufficient operating profits to cover their interest obligations, and reducing the risk of defaults and financial distress," Jaiswal said.

The coming years will likely bring more sources of borrowing beyond traditional bank loans. As that happens, Indian companies’ ability to maintain strong balance sheets while funding sustainable growth will be crucial.

This is the concluding part of a three-part data journalism series featuring a corporate health check-up in the post-pandemic period. 

The first part covered the profit concentration of India’s largest firms, and the second part was about their rising internal cash generation.