Over half-a-dozen companies, mostly from capital intensive sectors such as infrastructure, power generation and construction could face severe financial distress leading to IL&FS like moment, a new report taking note of their high debt has shown.
The list of companies, which includes the who's who of infra and construction space, have overstretched their balance sheets amid a slowing economy, resulting in a potential situation where these entities face the prospect of a sudden closure of operations.
According to the PCG Research reports with data sourced by Capitaline till March 31, 2019, companies such as Kesoram Ind., JP Associates, Adlabs Entertainment, Ashoka Buildcon, Bombay Dyeing, Emami Realty and Sadbhav Engineering had a debt to equity ratio (D/E) at unsustainable high levels, in the in the range of 26x to 10x.
Compared to comfort level of debt-equity ratio of around 2:1, these companies seem to have over-leveraged their positions, creating ground for potential default and subsequent failure of operations.
Other prominent names appeared in the list of companies with high net debt (excluding cash) were Jaypee Infrastructure (8.74x), Adani Power (5.52x) and Adani Green (5.34x).
"A D/E ratio of above 2:1 is not good for a company. It might be an indicator that either a company is troubled, or it could come under stress in near future," Deepak Jasani of HDFC Securities told IANS.
Further, among the list of 51 companies above the D/E of 2x were Usha Martin, HCL Infosystem, Network 18 Media, Ansal Properties, Dilip Buildcorn, JK Tyres and Industries, Power Grid Corporation, Hotel Leela Palace, Forbes & Co.
This is relevant as India's GDP growth rate is faltering, slowing for consecutive quarters.
IL&FS Transportation Network had a debt to equity ratio of 6.8x in FY18.
Last year, the Central government superseded the management of the beleaguered company via a National Company Law Tribunal (NCLT) order and appointed a six-member board led by Uday Kotak, MD & CEO of Kotak Mahindra Bank, to restore its financial solvency.
The firm has around Rs 91,000 crore in long-term debt. The credit crunch has led a few of the company's subsidiaries to default in servicing some of the inter-corporate deposits.
Consequent to defaults, a significant impact was felt in the capital market on account of the contagion effect of the IL&FS problem which had prompted the government to replace the Board.
IL&FS Ltd is a core investment company and serves as the holding company of the IL&FS Group, with most business operations domiciled in separate companies which form an ecosystem of expertise across infrastructure, finance and social and environmental services.
(Ravi Dutta Mishra can be reached at ravidutta.m@ians.in)