Why some debt-heavy companies are attractive for investment
Some debt-heavy cos that have received a battering on Dalal Street recently include Tata Steel, Hindalco, DLF and Jindal Steel, among others.
By Rajesh Mascarenhas, ET Bureau | Updated:
Is it a good time for investors to nibble at shares of debt-laden companies? Analysts say the possibility of credit rating upgrades coupled with cheaper valuations after the recent sharp correction have raised the prospects of these companies for risk-averse investors.
“Companies from infra and capital goods space are likely to turn around in the next few quarters, whereas commodity-based companies will recover in next two financial years,” said Dipen Mehta, head of research at Kotak Securities.
Some debt-heavy companies that have received a battering on Dalal Street recently include Tata Steel, Hindalco, DLF, NCC, Jindal Steel and Aban Offshore among others. Analysts expect some of these companies to see improvement in financial ratios for various reasons.
“Many of the stocks will recover in FY17 like Jindal Steel is expected turnaround with visibility of raw material supply and due to power purchase agreement, whereas DLF and Sobha Developers will recover over the likely pick-up in pre-sales units,” said Rakesh Arora, MD & head of research at Macquarie Capital Securities. “Similarly, Tata Steel on recovery of steel demand, Hindalco on complete ramp-up of greenfield aluminium smelters and coal supply visibility and NCC on higher order inflows from roads.”
Rating upgrades have picked up of late though the trend is nowhere close to conclude that companies will be out of the woods soon. In FY15, around 10% of total graded instruments were upgraded, the highest in 5 years, while 5% of instruments were downgraded, down from the peak of 10% in FY13.
Debt to equity ratio of BSE 500 companies (excluding financials) have declined from a 10-year high in FY14 to 0.57 in FY15, driven by a conscious effort to deleverage by corporates, according to Macquarie Research.
Aggregate net debt of the BSE-500 companies has declined by 8% in FY15.
Analysts say investors need to be choosy in this space. “Only few quality stock among the debt- heavy companies to bounce back in the near term,” said Mehta.
“Companies from infra and capital goods space are likely to turn around in the next few quarters, whereas commodity-based companies will recover in next two financial years,” said Dipen Mehta, head of research at Kotak Securities.
Some debt-heavy companies that have received a battering on Dalal Street recently include Tata Steel, Hindalco, DLF, NCC, Jindal Steel and Aban Offshore among others. Analysts expect some of these companies to see improvement in financial ratios for various reasons.
“Many of the stocks will recover in FY17 like Jindal Steel is expected turnaround with visibility of raw material supply and due to power purchase agreement, whereas DLF and Sobha Developers will recover over the likely pick-up in pre-sales units,” said Rakesh Arora, MD & head of research at Macquarie Capital Securities. “Similarly, Tata Steel on recovery of steel demand, Hindalco on complete ramp-up of greenfield aluminium smelters and coal supply visibility and NCC on higher order inflows from roads.”
Rating upgrades have picked up of late though the trend is nowhere close to conclude that companies will be out of the woods soon. In FY15, around 10% of total graded instruments were upgraded, the highest in 5 years, while 5% of instruments were downgraded, down from the peak of 10% in FY13.
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Debt to equity ratio of BSE 500 companies (excluding financials) have declined from a 10-year high in FY14 to 0.57 in FY15, driven by a conscious effort to deleverage by corporates, according to Macquarie Research.
Aggregate net debt of the BSE-500 companies has declined by 8% in FY15.
Analysts say investors need to be choosy in this space. “Only few quality stock among the debt- heavy companies to bounce back in the near term,” said Mehta.
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