An analysis of debt and assets of the 735 NSE-listed non-banking, non-financial companies shows

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that many seem to be carrying heavy burdens of borrowed money. They numbered as high as 550 in the last financial year. And as many as 200 of them were burdened under net debts of Rs 500 crore or more.

A glance at the top 10 companies with the highest net debt-to-assets ratios listed in the accompany-ing infographic will reveal that the most indebted was Tata Teleservices (Mahara-shtra). Its net debt outstrip­ped its assets by 1.13 times. In terms of net debt alone, however, Jet Airways carried the biggest burden. With net debt of Rs 13,530 crore and assets worth Rs 15,277 crore, its net debt-to-assets ratio of 88.56 per cent put it in the seventh place on our list.

The company with the second highest net debt was Tube Investments (Rs 8,747 crore). But with assets of Rs 10,272 crore, it had a net debt-to-assets ratio of 83.92 per cent, ranking it ninth on our list.

Three of the 10 firms are in sugar business. They are Simbhaoli (ranked fourth with a net debt-to-assets ratio of 91.35 per cent), Oudh (fifth, 90.88 per cent) and Mawana (10th, 83.55 per cent). The 550 firms were together carrying a net debt burden of Rs 8,45,353 crore, when their aggregate assets were Rs 21,00,419 crore.

The top 10 were evidently highly leveraged. Potentially, they carry greater risks in a down cycle. Now is one such cycle, with high interest rates and high inflation. High debt can be caused by sector-specific issues, according to Alok Agarwala, research head of Bajaj Capital. A company in manufacturing or construction requiring high capex, he says, will tend to have a net debt position. Then there are companies that accumulate higher debt than their industry averages because of poor working capital management, expansion or acquisitions financed mainly by debt.

Troubles arise when the economic or market environment deteriorates immediately after taking debt. The high interest cost of large debt then starts eating into profits, forcing a company to take on more debt to keep going. This is possibly what happened in Tata Teleservices (Maharashtra), or TTML, which, nevertheless, is confident of bringing down its debt burden in the next few years.

Kotak Securities’ fundamental research head Dipen Shah believes companies from sectors like telecom and airlines have high capex or working capital requirement. Some of them may not be able to generate enough cash to finance these because of intense competitive pressures.

In TTML in particular, says its spokesperson, the debt is high primarily because of 3G licence payments made last year. It has a mix of external commercial loans at low interest rates and … “vendor credit and buyer credit at rates much lower than normal long-term loans.”

Says Agarwala, “TTML has always been a high debt company, the main reason being high capex. And cash from operations was not enough to finance these investments.”

Himachal Futuristic came second in our list on the basis of financials for a 18-month financial year to September 30, 2010. (Last month it released a new annual report for a 12-month period to March 31, 2011, which could not be accommodated in this analysis.) On September 30 last year, the company had a consolidated net debt of Rs 1,172 crore, 1.07 times its total assets of Rs 1,090 crore.

But on March 31 this year, after a debt-restructuring exercise involving part conversion into equity, the company’s consolidated net debt stood lower at Rs 544 crore, which was 66.34 per cent of its new total assets size of Rs 820 crore. This is still at a high level but a company spokesperson says it is because “of high debt and accumulated losses in its subsidiary, HTL, acquired from the government”.

Spentex, a textiles exporter and third in our list, had a consolidated net debt of Rs 925 crore and assets of Rs 1,006 crore. Its finance director, Amrit Agrawal, attributes the high debt to three factors – the capital-intensiveness of the textile industry, its use of the “best in class” technology (read: expensive capex), and borrowing money for expansion.

Analysts are not surprised at the presence of three sugar companies in the top 10 list. Kotak’s Shah blames it on cyclical conditions. “Sugar companies face a down cycle every time there is a glut. Their financials, particularly for UP-based sugar mills, tend to be volatile, displaying high profits in some years and significant losses in other years,” he explains.

Simbhaoli Sugars, fourth in our list, explains its finance director Sanjay Tapriya, is a decades-old company and most of whose assets are historically old. “As a result the ratio of net debt to total assets has got skewed. “We were also carrying a very high stock of sugar in our books.”

Similar is the case of Mawana Sugars. Net sales last year of both the companies were more than their net debt obligations, though they did not stop them from posting net losses. Net sales of Simbhaoli and Mawana were Rs 1,262 crore and Rs 1,695 crore, respectively, and net loss Rs 75 crore and Rs 95 crore.

Oudh Sugar, with net sales of Rs 534 crore and net loss of Rs 82 crore, was clearly hard put to meet its net debt obligation of Rs 899 crore. Its assets were worth Rs 989 crore.

By far, the company with the biggest net debt, as stated earlier, was Jet Airways. Airlines went through turbulent times in the last two years. Though Jet Airways’ net sales were a robust Rs 14,356 crore, it suffered a net loss of Rs 214 crore, leaving little room for lowering debt. BF Utilities, sixth in our list, suffered with net sales of just Rs 74 crore. Worse, it had a net loss of Rs 88 crore. There was little it could do to lessen the net debt burden of Rs 1,261 crore. Though with much higher net sales of Rs 1,558 crore than BF, Asahi India Glass managed to make a net profit of only Rs 17 crore. It was saddled with net debt of Rs 1,528 crore.

The Murugappa group’s Tube Investments of India, ninth in our list, makes bicycles, precision steel tubes, strips, automotive chains, industrial chains, door frames and other cold-rolled sections for auto and other sectors. Its consolidated net debt of Rs 8,620 crore was 83.92 per cent of its total assets. But the company is not worried. Explains its chief financial officer Balasubramanian K: “Our long-term debt-to-equity ratio is 0.47, and Crisil/Icra have rated and assigned AA for our long-term debt and P1+ for short-term debt. The average borrowing rate for us is around 8.5 per cent and to meet the capex requirement, we will raise debt judiciously through a combination of foreign and local currencies. With healthy cash accruals, we are meeting all financial obligations timely.”

The large net debt accumulation is also a result of an acquisition that the company made. Balasubramanian points to the subsidiary, Cifco, primarily in the business of lending, which had Rs 8,000 crore as loans to support asset-backed lending of over Rs 9,000 crore. “Cifco became a subsidiary in April last year. As a result of the consolidation of financial subsidiaries, Tube Investments’ total debt increased from Rs 724 crore to Rs 8,747 crore.”

Says Kotak’s Shah, “If net debt remains very high over a long period, say three to four years or more, there is reason for concern.” Investors should look closely at the reasons for high debt.

Some debt on the balance sheet may even be healthy. Bajaj’s Agarwala believes so. It improves return on equity when the economy and the specific industry are growing, as debt comes at a lower cost than equity capital. “But when demand starts decelerating or margins are hit by rising input costs, companies with high debt are affected the most due to a higher interest burden,” he adds.

TTML has a plan. Says its spokesperson, “The repayments of long-term debt taken to pay the 3G licence fee will begin after 10 years, by which time the 3G business will stabilise, bringing positive cash flows. Our capex investments will be lower in coming years as we have already rolled out our network in substantial portions of the licensed area.”

Himachal Futuristic’s spokesperson claims the company is in the process of settling its debts by liquidating part of its debt-hit subsidiary's immovable properties for which approvals of appropriate authorities are being sought. The process is likely to be completed by next March.

Simbhaoli’s Tapriya is also confident. “We are restructuring our businesses by hiving off our liquor and power divisions into separate companies. Whatever cash we generate from this restructuring will be used to reduce debt in the sugar business.”

Officials of Oudh Sugar, BF Utilities, Jet Airways, Asahi India Glass and Mawana did not respond to our queries.

(Concluded)