Belt-tightening, better margins help cos to reduce debt burden

MUMBAI: A cost-conscious corporate India has pruned much of its bloated debt — a move that helped it save on interest cost and achieve better profitability in recent years.

Over the past five years, corporates across sectors have retired expensive debt and opted for alternatives sources of funds like FCCBs and GDR/ADRs, resulting in a significant improvement in their debt-equity ratio.

A study by ET show that many blue-chip companies have got rid of a significant part of debt with the help of mind-bending internal accruals in previous years and successful debt-restructuring initiated by them.

The study showed out of 62 manufacturing companies, forming part of high-profile A group, 40 have brought down their debt over the last five years, despite going ahead with significant capex programme.

The study also showed that 44 companies have reduced their interest payments over the 5-year period, between ‘01-02 and ‘05-06. Analysts said the trend is more apparent in sectors like cement, metals, sugar and construction. Most companies in these sectors have recorded a drop in debt and interest cost, resulting in improved profitability.

“Over the past two years, commodity prices have shot up, and many companies have churned out enormous profits. This has helped them reduce debt in their books, and strengthen their balance sheet so that they could hit the market again for cheaper funds as and when they implement capex plans in future,” said an analyst.

According to Samir Rachh, head of research, Emkay Share and Stock Brokers, many companies were forced to reduce their cost and control working capital requirements after their profitability came under heavy pressure during early ‘00.

“Corporates have been focusing on sweating their existing assets rather than investing money in fresh capex. This pushed up their cash flows which was used to reduce their debts. A lot of companies took advantage of falling interest rate and replaced their high-cost debt with cheaper one,” said Mr Rachh.

Among companies which have trimmed down their borrowings, Tata Steel is a classic case. Its total borrowings have come down in 5 years from Rs 4,709 crore in 2001-02 to Rs 2,516 crore in 2005-06. The company’s interest payments have fallen to Rs 168 crore from Rs 403 crore during the period.

Apart from Tata Steel, few other blue-chip companies like Gujarat Ambuja Cements, Mahindra & Mahindra (M&M), Indo Rama Synthetics, JSW Steel and CESC also figure in the list. These companies have brought down their borrowings, between Rs 500 crore and Rs 1,100 crore (CESC), while their interest costs have declined sharply.

Their profitability has improved significantly, partly on account of easing of interest cost burden. For instance, Tata Steel has seen its bottomline grow to Rs 3,506 crore in ‘05-06 from Rs 205 crore in ‘01-02, after adjusting for extraordinary items.

Utility vehicle major M&M’s net profit has jumped to Rs 857 crore from Rs 97 crore, while that of Gujarat Ambuja Cement has risen to Rs 468 crore from Rs 186 crore during the past five years.