Debt/Equity Equation

The India Inc is now busy raising funds through debt route. In fact the larger companies have had enough cash flow and don’t have extra-ordinary expansion plan compared to their present size and hence did not have the pinch of high interest rates or the tighter supply. But the case for the middle rung companies as also the smaller ones is different. These companies haven’t been able to grow profits much but have quite a larger room for expansion. The stock prices have been under pressure . Any fresh stock offering will either not be welcome if it is at some fancy premium because of market conditions. If the offering is at discount the promoters will have to dilute their own value too cheaply.

With this explanation , we at least understand that why the pipeline is almost dried up. It also tells us that the equities will not be further losing value because of the higher leverage . This is due the thorough understanding of the promoters who are raising debt funds without any compulsion of meeting the requirement of present business activity but are raising it for further expansion of businesses which have thrown possibility of returning enough for servicing the debt. This is a very welcome scene.

The total fund raising in 07-08 was Rs 3.77 lac crs of which debt formed 45% , in 08-09 it was Rs 2.88 lac crs and debt 80%, in 09-10 it scaled up to Rs 4.52 lac crs with debt at 65% , 10-11 saw it improve to Rs 5.44 lac crs with debt at 71% and lastly in 11-12 (11 months) the fund raising totaled Rs 5.90 lac crs of which debt is 88% . This is very revealing .  More than Rupees 15 lac crs of additional debt has become involved in India Inc’s business enterprises in last five years . Almost a similar amount has come by way of retained profits and newly raised equity funds . The present total market capitalization of above Rs 60 lac crs will hardly be threatened by carrying the additional weight of fresh debt . Five years is a sufficiently long time during which the average GDP growth has been not less than 6% . The sales have almost doubled over last five years.

In light of the facts discussed above , we should not be too wary against rising stock market with beginning of the new financial year in April 2012 . It may seem foolhardy on my part to speak like this while the atmosphere is getting vitiated every passing day .  One day CAG’s report about censuring govt for coal mines policy is leaked , than the late realization about govt’s tax loophole plugging (GAAR) becomes a concern , than the Army Chief speaks of bribe being offered at some time in past and the buck doesn’t stop at a UK fund finding fault with govt in managing the affairs the biggest govt company i e Coal India .  This kind of news flow is bad but it solidifies the equity prices against getting affected for lesser issues .

If the RBI’s intentions are genuine and the eventual easy money policy is going to come in vogue, then I think that the market’s will have to take a decisive upward turn . It has already been explained that debt will be lesser a burden and hence with higher levels of operations , the expected growth in profits or even the profitability will be expected. This kind of expectation is a real fuel that the market requires for fire-works. I am not suggesting that one be aiming at this while investing but it is to draw before you a possible scene. I would be first to caution you when the safety becomes a questionable aspect and that too company-wise to enable you to be sifting the portfolio. I have that confidence in my system of advising.

Hariom,

krsnaKhandelwal

One thought on “Debt/Equity Equation

  1. Pingback: Taylor J. Just Answer Your Questions About Today Stock Market Review · Latest Stock Market News

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