In recent years, the Indian market has been seen to be on a growth streak, providing good returns, and this is not just because investors are interested but also because Indian companies have made significant strides in reducing their reliance on debt.
Total borrowings rose by less than 1% in the 2023-24 fiscal year, marking the slowest growth in corporate debt in at least seven years. This trend is attributed to several factors, including improved cash flows and increased profitability, which have enabled companies to fund their operations and growth initiatives internally.
Debt-to-Equity Ratio: A Positive Shift
The debt-to-equity ratio, a critical measure of a company’s financial leverage, has shown a positive shift across various sectors. In the 2023-24 fiscal year, more than half of the sectors showed declining debt-to-equity ratios. With less debt, companies can be more profitable and contribute capital towards further growth.
This indicates a move towards equity financing, reducing dependency on debt. Notably, sectors such as FMCG, chemicals, textiles, and agriculture experienced an aggregate debt growth of around 25%, while others, including power and oil & gas, saw reductions in their debt levels.
| Sector | Year-on-year change (%) in total debt during FY24 |
| FMCG | 26 |
| Chemicals | 25.9 |
| Textiles | 25.7 |
| Agriculture & allied | 25.3 |
| Capital goods | 12.4 |
| Power | 0.4 |
| Oil & gas | -4.2 |
| Consumer durables | -6.4 |
| Hospitality | -9.7 |
| Auto & ancillaries | -25.6 |
Improved Interest Coverage Ratio
Lower debt levels contribute to future financial security for companies. The interest coverage ratio is a valuable metric for evaluating this. It’s the ratio between a company’s operating profit and interest payments. A higher ratio shows that a company can comfortably cover its interest payments with operating profits. Companies have benefited from lower commodity prices and easing inflationary pressures, which boosted operating profits. The overall interest coverage ratio improved 8.2 times in 2023-24 from 7.2 in the preceding year, a sharp improvement from 2020-21, when it stood at 6.4 times.
The improvement signifies better debt-servicing capabilities among Indian companies. Only 20 companies have a critically low-interest coverage ratio of 1.5 or lower—the lowest in at least eight fiscal years.
| Year | Amount (trillion) | Y-O-Y (%) |
| 2017-18 | 12.1 | 5.9 |
| 2018-19 | 14.4 | 19.1 |
| 2019-20 | 18.1 | 25.3 |
| 2020-21 | 19.8 | 9.8 |
| 2021-22 | 20.2 | 1.9 |
| 2022-23 | 22.1 | 9.3 |
| 2023-24 | 22.3 | 0.9 |
Rise of Alternative Financing
As traditional bank loans become less central to corporate financing strategies, companies increasingly turn to alternative avenues such as bond markets and global tie-ups to raise capital. This shift diversifies their funding sources and strengthens their balance sheets, contributing to more sustainable growth.
Sector-Specific Insights
- FMCG and Chemicals: These sectors have seen robust debt growth, reflecting ongoing expansion and investment activities. However, this has been managed well with improved cash flows, ensuring that the debt levels remain sustainable.
- Power and Oil & Gas: These sectors have made notable progress in reducing their debt burdens, which can be attributed to strategic financial management and possibly divestment or restructuring initiatives.
Future Outlook
The trend towards reduced debt reliance is expected to continue, supported by strong profitability and efficient cash flow management. Companies will likely explore and expand alternative financing methods, fostering a more resilient and financially stable corporate sector in Indiaand creating a healthy market for seasoned and new investors.
In summary, the Great Indian Debt Detox highlights a pivotal transformation in Indian companies’ financial landscapes. By reducing debt and enhancing financial stability, Indian businesses are better positioned for sustainable growth and resilience against economic fluctuations.
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FAQs
What is the “Great Indian Debt Detox”?
The “Great Indian Debt Detox” refers to the recent trend among Indian companies of reducing their reliance on debt. In the fiscal year 2023-24, total borrowings increased by less than 1%, marking the slowest growth in corporate debt in at least seven years. This shift is attributed to improved cash flows and higher profitability, allowing companies to fund their operations and growth initiatives internally.
How have Indian companies’ debt-to-equity ratios changed?
In the 2023-24 fiscal year, more than half of the sectors tracked by Mint saw a decline in their debt-to-equity ratios. This indicates a shift towards equity financing and reduced dependency on debt. Sectors such as FMCG, chemicals, textiles, and agriculture experienced aggregate debt growth of around 25%, while the power and oil and gas sectors saw reductions in their debt levels.
What is the interest coverage ratio, and how has it improved?
The interest coverage ratio measures a company’s ability to service its debt with its operating earnings. It is the ratio between a company’s operating profit and interest payments. A higher ratio indicates better debt-servicing capabilities. In 2023-24, the overall interest coverage ratio improved 8.2 times from 7.2 times in the previous year, marking a significant improvement from 2020-21, when it was 6.4 times.
Why is a higher interest coverage ratio important?
A higher interest coverage ratio means that a company can comfortably cover its interest payments with its operating profits, reducing financial risk and paving the way for future financial security. Companies in the sample benefited from lower commodity prices and easing inflationary pressures, which boosted operating profits.
How have alternative financing options impacted Indian companies?
Indian companies increasingly turn to alternative financing options such as bond markets and international partnerships, reducing reliance on traditional bank loans. This diversification in funding sources is expected to continue, contributing to stronger balance sheets and sustainable growth.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
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