India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Till debt do us part
ƒ Tepid equity market, tight credit enhance concerns on high leverage
ƒ Some companies' leverage increased sharply over the past 2-3 years
ƒ Unitech, BGR, Suzlon, Punj Lloyd, GMR, HDIL have low debt serviceability
ƒ FCCB non-conversion could increase D/E for Suzlon, Sintex, Rolta, RCOM
During periods of lacklustre equity markets and tight credit environments, corporate inability
to repair their balance sheets brings investor concerns about high leverage to the fore.
Additionally, for some companies, actual debt may be higher than it appears – because nonconversion of underwater FCCBs could force companies to raise more debt.
Deteriorating debt serviceability
While overall corporate leverage has declined, certain stocks and sectors – infrastructure, in
particular – have seen an increase in debt-to-equity ratios over the past few years. This,
coupled with pressures on profitability from margin declines and execution slippages, has
pressured the companies’ abilities to service debt. In particular, companies with low interest
coverage ratios and high leverage – Unitech, BGR Energy, Suzlon Energy, Punj Llyod, GMR
Infra, HDIL, Nagarjuna Construction, HCC, DLF, Bajaj Hindusthan, IVRCL Infra, GVK –
appear to be at risk in a rising rate and slow growth environment.
FCCB redemptions
USD 7b worth of FCCBs raised in 2006-07 are due for redemption in FY12 and FY13. After
the correction, stock prices of most companies that had issued FCCBs are trading below the
conversion price. We believe Suzlon, Sintex, Rolta and Reliance Communication could be at
risk of significant increase in leverage as a consequence of FCCB non-conversion.
Balance sheet repair not possible in lacklustre equity market
Concerns about debt on corporate balance sheets usually come to the fore when equity
markets are lacklustre. That is the time when corporates are unable to raise equity from
the market, and are therefore unable to “repair” their balance sheets. If such a period
coincides with an environment of tight credit availability and rising interest rates,
concern about potential delinquencies, debt restructurings and strains on balance
sheets become tremendously important.
Moreover, in the current environment, decelerating growth and margin pressures have
squeezed corporate profitability. In this context, certain companies’ ability to service
debt has come under question. Additionally, the quantum of debt currently visible on
balance sheets may be a mirage. Many companies issued foreign currency convertible
bonds (FCCBs) in 2006-07. Stock prices of many such companies are trading at levels
that will not allow conversion, increasing the risk that these companies default on their
debt obligations.
In this report, we identify companies most at risk in a high interest rate and depressed
equity market environment. In particular:
1) We screen our coverage universe to identify the companies that might need to
raise equity/roll over debt as their earnings (EBIT) may not support debt
servicing obligations
2) We identify companies with FCCBs outstanding, especially those that do not
stand a good chance of the FCCBs being converted. We then analyse the
consequent impact on the balance sheets of these “risky” companies.
Debt overhang
As we highlighted earlier (Defence is the best offence, 20 June), balance sheets have
improved since the 2008-09 slowdown as companies have raised equity to pay back
debt and slowed capex plans. However, indebtedness of many individual companies,
particularly in the infrastructure sector has increased. For instance, in the cases of BGR
Energy, Dish TV, Adani Power, and GMR Infra the increase in the net debt-to-equity
ratio has been substantial.
Rising commodity prices, coupled with slowing demand, have hurt the profitability of
many companies. Moreover, risk aversion among banks owing to slowdown fears could
create debt rollover risks for these companies. We therefore screen our universe to
identify companies which have low interest-coverage ratios. Exhibit 2 shows that as
many as 13 companies under our coverage have interest coverage ratios
(EBITDA/interest payable) of less than 4x in FY12. The profitability of these companies
could come under pressure if they fail to roll over debt at reasonable interest rates or
raise equity
On this parameter, Unitech, BGR Energy, Suzlon Energy, Punj Llyod, GMR Infra, HDIL,
Nagarjuna Construction, HCC, DLF, Bajaj Hindusthan, IVRCL Infra, GVK, show up as
being risky – again these companies are predominantly from the construction and real
estate sectors. These companies have operating cash flow/interest expense ratios of 2x
or lower, implying that half of their operating cash flow in FY12 could be used for
interest payments alone
An additional overhang on stock prices could be the pressures from FCCBs that were
issued during the heady days of 2006-07 that are due for redemption/conversion in the
next few quarters.
FCCB redemption
After the correction in equity markets in H1 2011, stock prices of most companies that
had issued FCCBs are trading below the conversion price. As a result, they could have
to repay the principal at maturity value by issuing equity and/or borrowing at higher
interest rates. The RBI estimates that FCCBs worth more than USD7b are due for
redemption in the next two years.
In particular, in the BNP coverage universe, with the exception of Tata Motors and L&T,
most of the FCCBs are substantially ‘under water’ (i.e. current price below conversion
price)
nice informatins India Market Outlook
ReplyDelete