India Inc.'s Debt Addiction
China's borrowing spree grabs headlines, but India's current corporate earnings season is also proving to be all about debt. More precisely, it's proving to be about the folly of investors' ardent hope that somehow companies and banks will outgrow their liabilities even in a slow economy. As two results on Thursday underscored, rather than getting on top of the problem, India Inc. is sinking deeper under the weight of leverage.
The first of those announcements came from ICICI Bank.
India's largest non-state-controlled lender reported almost a full percentage point jump in its bad loans from the September quarter to 4.72 percent. Aggressive loan-loss provisions saw net profit growth slow to a six-year low. The difference with rival HDFC Bank, whose gross nonperforming loans are much better contained at 0.97 percent of total advances, couldn't be starker. HDFC gets 52 percent of its revenue from retail customers, compared with less than 24 percent for ICICI. With companies in the infrastructure and metals businesses struggling to mend their tattered balance sheets, the pall of gloom that hangs over major corporate lenders is unlikely to lift. That's of particular concern to investors in India's state-run banks, which control the bulk of the economy's financial assets. A Goldman Sachs exchange-traded fund that seeks to replicate returns from these lenders has lost 46 percent over the past year.
The other shock came from Bharti Airtel, India's largest wireless service provider. It announced a 22 percent slump in net profit from a year earlier. In just three months, net debt jumped by more than $1 billion to almost $12 billion. Bharti has spent 98 percent more on capital expenditure over the past four quarters than it did in the 2014 financial year. This is worrying on two counts. One, the impending entry of billionaire Mukesh Ambani's fourth-generation service is bound to force incumbents like Bharti to keep spending in order to stand any chance of competing against Reliance Jio for a share of the country's growing data business. That could put further pressure on corporate balance sheets. At the same time, India's telecom regulator is planning an expensive sale of spectrum. If the cash-strapped Indian government decides to go ahead with an auction, mobile operators will be caught in a prisoners' dilemma. While they'd be doing their investors a favor by sitting out the sale, if even one of them decides to bid, the others will be at a disadvantage. And, of course, whoever does win the spectrum will be saddled with more debt.
India's corporate leverage problem doesn't get nearly as much attention as China's. That's partly because the debt-to-equity ratio for the top 500 publicly traded Indian stocks is 126 percent, versus 211 percent for companies on the CSI 300 Index:
However, when it comes to companies' ability to service that debt, Indian corporates -- in the aggregate -- may be worse off:
By the time India's reporting season ends, analysts will probably have marked down their estimate of almost 17 percent growth in per-share earnings for the benchmark Nifty Index over the next 12 months. It will be more worrisome, though, if they further slash their cash flow forecasts, which are currently signaling a 2.4 percent decline. ICICI and Bharti Airtel's results have shown the fault line. With debt troubles intensifying, less cash from operations will make India Inc.'s already stretched balance sheets groan even louder.
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