DAYS OF DEFAULT ON THE HORIZON?

By Ruma Dubey

First it was Videocon Industries. Last week, the stock was pummeled down to pulp and continues to be beaten after Dena Bank, followed by Central Bank of India classified loans to Videocon as a non-performing asset .The company’s fight with its gargantuan debt is scaring the marketmen. The consumer electronics and home appliances manufacturer’s total debt stood at Rs 43,017 crore as on June 2016, according to CARE Ratings and Research. . 99.26% of promoter shareholding is pledged with various lenders at the end of March 31, 2017. Clearly, the company is leveraged to the hilt.

And then we had Reliance Communication. We knew all along that ADAG companies are leveraged to the maximum but the burden seems to be becoming unbearable for Rcom after elder brother’s Jio lietrally broke the back of every telecom company in India. For the first time in 20 years, it posted its first-year loss of Rs1,285 crore for FY17 v/s  net profit of Rs.660 crore. More than the losses, what has spooked the market is the debt scenario after over 10 banks raised the red flag on Rcom. Economic Times put out a report stating, “Anil Ambani-owned mobile phone operator has defaulted on its loan servicing obligations with more than 10 local banks, some of whom have categorised the exposure as "special mention account" in their asset books.” The company is sitting on debt to the tune of over Rs.47,000 crore.

These two are not the only ones with such huge debts. Probably, the biggest one of them all is Jaiprakash Associates, with Rs.68,000 crore of debt. And then there are the usual suspects – Lanco Infra with almost Rs.45,000 crore,  GVK Power with some Rs.27,000 crore, Bhushan Steel at over Rs.43,000 crore, IL&FS Engineering at around Rs.27,000 crore, MTNL has debt of almost Rs.20,000 crore, Jindal Steel & Pwer’s debt is to the tune of Rs.32,600 crore, debt of DLF has come down but still stands at over Rs.25,000 crore and there are many more like GMR Infra, Reliance Power …. the list is almost endless.

The market is wary of these stocks as their costs will continue will eat away the margins and future growth. Highly leveraged companies are currently concentrating on reducing debt through sale of non-core assets and there is no way they are going to get into any new project. This means growth for such leveraged companies is now stagnating and their improvement in margins can happen, at least for now, only by reducing debt.

These companies have, during the good times, allowed their ambitions to run unbridled, running ahead of reality and logical thinking. Getting into unrelated ventures, expanding beyond their means, these companies are today more caught up in servicing their illogical debts putting all growth on hold. So how is anyone else responsible for lack of growth? It is an easy way out to always lay the blame on others. Blaming the RBI Governor for being “too cautious” is indeed very immature. For now, these companies have to concentrate on cleaning up their balance sheets, getting aggressive on selling sub-standard investments of the pre-2008-09 heady days.

KV Kamath, BRICS bank chief had rightly said, “India Inc's problems, both of perception and reality, might be internal. I hardly hear complaints regarding project clearance being held up by the New Delhi bureaucracy and that the 'policy paralysis' that characterised the last years of the Manmohan Singh regime, is a thing of the past.”

These companies are paying the price of unbridled, mindless ambitions but sadly the shareholders and banks are paying a high price. Whom do we blame for all this?