Companies that can survive Liquidity Crunch
Mahesh Patil
Most metal companies have manageable debt levels while the balance sheet position of pharmaceutical companies is mixed. The liquidity position is very weak for the real estate sector and that for telecom is moderate; it is strong for the oil and gas sector.
Metal companies' debt manageable
Most metal companies have manageable debt levels, though high leverage remains a concern for Tata Steel, Hindalco and JSW Steel, which made huge acquisitions in the recent past.
Steel companies had embarked on major expansion plans, but given the current slowdown in demand, they may go slow or defer their expansion plans until situation improves.
In the metal companies, SAIL stands out in the ferrous space with attractive debt equity and interest coverage ratio. Nalco, Hindustan Zinc and Sesa Goa are debt-free companies, thus insulated from refinancing and liquidity risk.
Across the sector, interest coverage is strong to moderate in FY 2008 and likely to sustain in FY 2009.
Pharma companies to continue acquisitions
The balance sheet position of pharmaceutical companies is mixed. Sun Pharma has a strong balance sheet with high cash balance of over Rs 1,300 crore. GSK Pharma also stands out, with almost zero debt.
Wockhardt has a total debt of USD 730 million and a debt equity ratio of 2.34 in FY08. The financials of Aurobindo are week, with high debt and thus high interest expenses. The company has capex plans of Rs 250 crore in FY09.
Ranbaxy too has high debts but a cash infusion of USD 750 million by Daiichi Sankyo would reduce the leverage. Cipla has a capex plan of Rs 2,000 crore over the next two years.
Capacity expansions for most other pharmaceutical companies have already happened. Acquisition in this space still remains the buzz word. Companies like Sun Pharma, Ranbaxy, Glenmark and Lupin will continue to pursue their acquisitions.
Tech cos see increasing trend of cash burn
Indian IT companies have always been given a thumbs up for their cash positions, but is the trend set to change? Indian technology companies are best placed in terms of cash in balance sheet. Most of the balance sheets carry low debt except 3i Infotech and Wipro. HCL will also raise debt for Axon acquisition and will make it first top Tier-I company to have net debt (more debt than cash position). But, the trend is all set to change. TCS payout for citi BPO, Tech Mahindra upfront payment, Satyam buyout of caterpillar market research unit all are pointing to an increasing trend of cash burn. Cash positions could be used to support clients for getting preferential treatment in other contracts. Extended credit periods to clients could have an immediate impact on the working capital efficiency. In H1CY09, working capital has already shown an uptick for some Tier-I companies.
Cash per share Cash/mktcap Debt-equity
Infosys 192 16% 0
TCS 61 12% 0.04
Satyam 89 36% 0.02
Wipro 66 28% 0.34
HCL Tech 38 27% Debt for Axon
Patni 101 70% 0
3i Infotech 25 63% 1.6
Tech Mahindra 74 27% 0.02
Realty sector declined over 87%; has weak balance sheet
Realty index declined by more that 87% from its January 2008 highs and the balance sheet/liquidity position is very weak for this sector. It is a highly levered sector with net gearing at 60% for FY08 and FY09; its gross debt/EBITDA is at approximately two times.
A lot of gross debt is repayable in the next 6–12 months. Servicing of bullet repayments is falling due within FY09 which remains a key challenge. Analyst expect delinquencies from small real estate companies and Q2 results do not reflect higher interest outgo, as most companies are capitalizing substantial amount of interest expenditure.
The strongest position is held by Indiabulls Real Estate (IBREL) as its balance sheet is fully funded for FY09 and FY10. IBREL had a gross cash of Rs 36 billion and a gross debt of Rs 10.5 billion. The weakest players are Unitech, Sobha and Puravankara. IBREL's net debt/equity ratio is at -0.5 times while DLF's is at 0.6 times. Unitech and Sobha have net debt/equity ratio of 1.8 times. If one includes land cost outstanding the gearing jumps to over 2.5 times
Telecom sector balances its liquidity moderately
The balance sheet position for the telecom sector is moderate. Bharti is most comfortable with a leverage of 0.3 times. It has started generating free cash flow from Q2. Leverage for Idea and RComm are at 1.3 times and 1.6 times, respectively. Idea's leverage will reduce due equity infusion by TMI.
Bharti is likely to comfortably meet the redemption requirements buffered by strong cashflows. RComm has strong cashflows but the position on repayments is not clear. Upcoming 3G spectrum auction in January 2009 could however put pressure on balance sheets in case of overbidding. Analysts feel 3G Licence Fees will involve cash outgo of USD 1–1.5 billion in the next six months.
Oil and gas sector emerge strong
The balance sheet position for the oil sector is strong. The energy sector, overall, has low net debt/equity at approximately 17% for FY08 which is expected to slip even further in FY10. Upstream companies have lower gearing, but could come under stress in the coming years. Strong companies are ONGC and Cairn India. ONGC's net cash is expected at Rs 27,544 crore in FY09. RIL has 40% net debt/equity in FY08 and it is likely fall to 10% by FY10e. The weakest balance sheets are those of HPCL and Aban Offshore. HPCL faces significant refinances risk and ABAN's debt/equity ratio is expected at 11.3 times in FY09. Its operating EBITDA/interest expense is also at 1.6 times.