Wanna play safe? Look at debt-free stocks that rallied up to 122% in 2019

Culturally, Indian society sees debt as something that should be generally avoided. Last year, at a time when a number of companies struggled with debts, this sentiment was all pervading among stock investors, who shunned leveraged businesses to bet on debt-free ones. That resulted in an asymmetric rise of pockets of stocks.

Stocks of a majority of companies that are virtually debt free jumped as much as 122 per cent in 2019. Fifteen of the top debt-free companies rewarded their investors with over 50 per cent market returns during the year.

They included Reliance Nippon Life Asset Management (RNAM), HDFC AMC, Astrazeneca Pharma India, Info Edge (India), Abbott India, Whirlpool Of India, Dr Lal Pathlabs, HDFC Life Insurance, SBI Life Insurance, Indraprastha Gas, Multi Commodity Exchange of India, Bata India and Avanti Feeds, among others.


Analysts say their charm will roll on going forward given the difficult business environment in the economy.

“In the current environment, when access to capital vis-a-vis what was 12 months back has become difficult and cost of capital has also moved upward, the health of the balance sheet of a company will play a far more important role and, hence, companies that have negligible debt will enjoy an advantage in the eyes of equity investors,” said Ajay Bodke, CEO & Chief Portfolio Manager -PMS at Prabhudas Lilladher.

At the same time, these companies will enjoy a higher valuation multiple compared with the highly-indebted ones.

The best performers among the 15 companies mentioned above are RNAM and HDFC AMC, both of which doubled investors’ wealth. Of the 13 analysts that cover HDFC AMC, seven are bullish while four have ‘hold’ ratings, Reuters data showed. Only two analysts had either ‘underperform’ or ‘sell’ ratings on the stock.

Similarly, out of 10 analysts that cover RNAM, two had ‘buy’ recommendations, five ‘outperform’ and three ‘hold’.

Vijay Kedia of Kedia Securities says owning debt-free companies is naturally advantageous. “But being only debt-free is not important, growth should also accompany it. Debt is not all bad, if it comes with 10-20 per cent growth. I will prefer that instead of a business with zero debt and no growth,” said Kedia.

He said debt should be reasonable, so that a company has no problem servicing it. “Moreover, the cash flow of the company should also be strong after paying interest. Companies having high debt-equity ratios may go bust in a single slowdown.”

Of the 95 names in the BSE500 index that have debt-equity ratios close to zero or zero, 54 delivered positive returns in 2019. Rest slipped up to 54 per cent.

Tejas Networks was the biggest loser in 2019, followed by eClerx Services, Lakshmi Machine Works, NBCC India, Nocil, V-Mart Retail, TV Today Network and Care Ratings, among others.