Unless a solution to the problems of the heavily leveraged sectors and corporates is found, it is very unlikely that the economy will move ahead, says Espirito Santo Securities
Over the last five years (FY07-FY12) the debt of the top 10 debt-laden Indian conglomerates has increased at a CAGR (compounded annual growth rate) of more than 40%. This led to significant concentration of the banking system debt with the top 10 Indian groups accounting for nearly 12.6% of the total banking system debt.
Figure 1 Debt as a % of total banking system advances
Figure 1 shows the group debt as a percentage of the total banking system advances of the top 10 corporate groups. This analysis is based on a report by Espirito Santo Securities. The Anil Ambani group (ADAG), Essar and Vedanta groups account for the top 6.4% of the total banking system advances. This is followed by Adani and Jaiprakash groups.
Of the groups deeply in debt, most, if not all have large interests in the infrastructure space with some of them being pure play infrastructure companies such as ADAG, Adani, GMR, Lanco and GVK. Others such as Vedanta and JSW invest mainly in metals and mining along with having interests in power generation.
It does not come as a surprise that it is these specific sectors, infrastructure, in particular, which are facing problems. According to Espirito Santo, understanding the fate of these large corporates and the sector specific issues can give us a glimpse of the asset quality problems.
Espirito Santo adds “Unless a solution to the problems of these heavily leveraged sectors and corporates is found, it is very unlikely that the economy will move ahead.”
As can be seen in the above graphs, the balance sheets and P&Ls for these groups are significantly stretched, as is clearly visible from the low interest coverage ratio which is hovering precariously close to the 1x, and the high leverage of the balance sheet at more than three for nearly six of the top 10 groups.