{"id":40997,"date":"2024-07-19T18:19:34","date_gmt":"2024-07-19T12:49:34","guid":{"rendered":"https:\/\/www.equentis.com\/blog\/?p=40997"},"modified":"2024-11-16T16:11:57","modified_gmt":"2024-11-16T10:41:57","slug":"how-the-debt-detox-is-breathing-new-life-into-india-inc","status":"publish","type":"post","link":"https:\/\/www.equentis.com\/blog\/how-the-debt-detox-is-breathing-new-life-into-india-inc\/","title":{"rendered":"How the Debt Detox Is Breathing New Life into India Inc"},"content":{"rendered":"
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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. <\/p>\n\n\n\n

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What is Cash Flow Statement<\/a><\/div>\n<\/div>\n\n\n\n

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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\u200b\u200b. 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.<\/p>\n\n\n\n

Debt-to-Equity Ratio: A Positive Shift<\/strong><\/h2>\n\n\n\n

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\u200b\u200b. With less debt, companies can be more profitable and contribute capital towards further growth.<\/p>\n\n\n\n

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Source: Livemint.com<\/a><\/figcaption><\/figure>\n\n\n\n

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\u200b\u200b.<\/p>\n\n\n\n

Sector<\/strong><\/td>Year-on-year change (%) <\/strong>
in total debt during FY24<\/strong><\/td><\/tr>
FMCG<\/td>26<\/td><\/tr>
Chemicals<\/td>25.9<\/td><\/tr>
Textiles<\/td>25.7<\/td><\/tr>
Agriculture & allied<\/td>25.3<\/td><\/tr>
Capital goods<\/td>12.4<\/td><\/tr>
Power<\/td>0.4<\/td><\/tr>
Oil & gas<\/td>-4.2<\/td><\/tr>
Consumer durables<\/td>-6.4<\/td><\/tr>
Hospitality<\/td>-9.7<\/td><\/tr>
Auto & ancillaries<\/td>-25.6<\/td><\/tr><\/tbody><\/table>
Source: Livemint.com<\/a>
<\/figcaption><\/figure>\n\n\n\n

Improved Interest Coverage Ratio<\/strong><\/h2>\n\n\n\n

Lower debt levels contribute to future financial security for companies. The interest coverage ratio is a valuable metric for evaluating this. It\u2019s the ratio between a company\u2019s 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. <\/p>\n\n\n\n

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Source: Livemint.com<\/a><\/figcaption><\/figure>\n\n\n\n

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\u2014the lowest in at least eight fiscal years\u200b.<\/p>\n\n\n\n

Year<\/strong><\/td>Amount (trillion)<\/strong><\/td>Y-O-Y (%)<\/strong><\/td><\/tr>
2017-18<\/td>12.1<\/td>5.9<\/td><\/tr>
2018-19<\/td>14.4<\/td>19.1<\/td><\/tr>
2019-20<\/td>18.1<\/td>25.3<\/td><\/tr>
2020-21<\/td>19.8<\/td>9.8<\/td><\/tr>
2021-22<\/td>20.2<\/td>1.9<\/td><\/tr>
2022-23<\/td>22.1<\/td>9.3<\/td><\/tr>
2023-24<\/td>22.3<\/td>0.9<\/td><\/tr><\/tbody><\/table>
Source: Livemint.com<\/a><\/figcaption><\/figure>\n\n\n\n

Rise of Alternative Financing<\/strong><\/h2>\n\n\n\n

As traditional bank loans become less central to corporate financing strategies, companies increasingly turn to alternative avenues such as bond markets and global<\/a> tie-ups to raise capital\u200b\u200b. This shift diversifies their funding sources and strengthens their balance sheets, contributing to more sustainable growth.<\/p>\n\n\n\n

Sector-Specific Insights<\/strong><\/h2>\n\n\n\n