India Inc. has taken a leaf out of the downturn in the pandemic-stricken economy to tighten its belt via massive deleveraging.
Corporate India’s gross debt reduced by almost one fifth and net debt (gross debt minus cash) by a very substantial—one third.
In FY 2021 (April 2020- March 2021), corporate India has reduced net debt by nearly 30% and gross debt by 17%, which coincided with the massive bull run in Indian equity markets. The go-go market of 20s is flying on the back of huge savings and profit generation from this deleveraging.
According to Capitaline Database, 750 companies reduced their gross debt by ₹3 lakh crore to ₹14.7 lakh crore in FY21 from ₹17.71 lakh crore in FY20 and net debt by ₹4 lakh crore to ₹9.5 lakh crore in March 2021 from ₹13.51 lakh crore in March 2020.
To be sure, corporate India has never seen such a massive deleveraging and experts believe this will lead to revival of the next capex cycle for private sector. Private investments into new capacity generation had come to a standstill in the past one decade as aggregate capacity utilisation remained in a tight band of 60%-65%, leaving more than three years of headroom for growth in most sectors.
As per Capitaline database, top five gross debt reducing sectors in last fiscal were: refineries (₹75,823 crore), steel (₹44,635 crore), textiles (₹14,384 crore), fertilisers (₹10,780 crore) and power generation (₹10,230 crore).
Though, current deleveraging is broadbased but two companies namely Reliance Industries (approx. ₹67,656 crore) and Tata Steel (approx. ₹31,000 crore) played a key role in reducing gross debt of corporate India. At group level, Reliance gross debt came to ₹2.43 lakh crore in FY 2021 from ₹3.1 lakh crore in FY 2020. Tata Group (excluding Tata Motors) gross debt reduced by ₹45,853 crore and stood at ₹1.34 lakh crore in March 2021 from ₹1.8 lakh crore in March 2020.
“In my career of over 30 years, I have never seen such rapid pace of deleveraging. Smart money is flowing into markets purely on the back of earnings improvement and net debt reduction,” says Sandeep Shenoy, a market veteran and Executive Director of Mumbai based Investment boutique firm Pioneer Invest Corp. Even though global liquidity has got all the credit for stock market rally but a bigger picture is massive deleveraging and strengthening of Corporate India’s balance sheet.
Shenoy has a valid point as India is the major beneficiary of foreign institutional investors. India received $31.26 billion (₹2.34 lakh crore) in last 12 months ending July 2021. Globally, this was the largest emerging market FIIs equity flow, according to Bloomberg. In fact, in the same period, except Brazil all prominent emerging markets saw a net outflow.
Global liquidity is following solid fundamental growth in terms of key valuation parameters. Nifty EBITDA margins were up 427 basis points, PAT margins were up 287 basis points while net debt came down to 0.4x in FY21 from 0.7x in FY20.
Due to solid recovery in earnings and global inflow, Nifty is currently trading at 68% premium to Emerging Markets, it’s highest in the last 10 years. The market is currently trading at 21.4 times one year forward earnings which is way above 10 year average valuation of 16.1 times, says a Nomura report dated August 30, 2021.
“While flows have played a part in fueling the current rally but no one would have imagined that in a year plagued by a black swan event like Covid, such a drastic deleveraging could have played out,” says Kunal Bhakta, co-founder, First Water Capital Fund, a listed AIF, expressing surprise over Corporate India revival during the pandemic.
With the economy opening up, it is safe to assume that this deleveraging will be a lot more pronounced in H1 FY21 (April 2021- October 2021). Capex revival is the next big thing to watch. With a revival of the capex cycle and the spate of corporate announcements further buoyancy in the listed markets cannot be ruled out.
Market participants and brokerage houses believe that every quarter cumulative earnings of Nifty companies would be ₹1.5 lakh crore. The Nomura report states that the consensus estimate currently expects Nifty earning to record a CAGR of 26% over FY2-FY23 compared to a 6% CAGR over FY18-FY21.
On the street there is a unanimous view that with over ₹6 lakh crore of annual corporate profit, corporate India has never been stronger. So the current rally in India market may have some more headroom left.