Till Debt Do Us Part

Corporate India’s interest outgo is growing faster than its operating income. As sectoral issues combine with a slowdown to pull down earnings, servicing debt could become more challenging.

- Rashmi Pratap

In his book 'How the Mighty Fall', American business consultant and author Jim Collins outlines five stages of decline that even the best of companies could witness – beginning with hubris born of success and ending with the entity becoming irrelevant or dead. But when many mighty companies begin to feel headwinds at the same time, witness credit downgrades, struggle with dwindling profits and rising debt, there is more to the story than just the five internal stages of a giant’s decline.

The last two years can well be called the years of the fall of the mighty in India Inc. There is hardly any business expansion or new project, debt overhang is looming large, there have been defaults by those who seemed infallible until this time last year and many are facing bankruptcy proceedings.

Debt papers of companies of billionaires Sunil Bharti Mittal, Ajay Piramal and Mangal Prabhat Lodha besides biggies like Tata Motors, ICICI Bank, VodafoneIdea and many others have been downgraded by credit rating agencies in the last eight months on the back of weakening financial performance and rising debt levels.

The mightiest in their sectors, IL&FS and Dewan Housing Finance, are now a pale shadow of their peak avatars; Subhash Chandra’s Essel Group has been so far unsuccessful in lowering its debt levels and Jet Airways, once India’s largest commercial passenger airline, is history. And that’s just in the key sectors like telecom, auto, aviation and real estate. “Rating downgrades for large companies are a precursor to what could happen to smaller companies. Smaller players will find credit availability getting tightened and they will be under intense scrutiny by lenders. This will only make the going tougher at a time when liquidity is not easy to come by,” says Dhananjay Sinha, Head of Strategy Research and Chief Economist, IDFC Securities.