Beware Of Bad Debts.
December 29, 2015 Leave a comment
As per RBI figures, a debt of Rs. 5.65 lakh crore (a fifth of the total debt in India) was shared by 67 of the 441 top indebted companies in India at the end of the year 2014-2015. This theoretically makes these companies financially insolvent, which means that the company is no longer able to meet it’s financial obligations.
This number has increased from 49 in the previous year to 67 in 2014-2015.
The return on capital employed has hit 7.4%, barely a few basis points ahead of the average interest cost of 7.1%.This is the lowest value recorded in the decade; in 2004-05, the reported RoCE was about 18% while the interest cost was 6.9%.
This forces companies to spend a greater proportion of their operating profit on clearing debts than on capital servicing and growth.The companies spent up to 34.2% of the profit on debt expenditure this year leaving little for capital growth. Though where in the world extra profits will be absorbed is a moot point.
Beware of investing money in these stressed companies. Beware of investing or lending to entities that have financed these groups. Position yourself to de-risk and benefit from the artificially low administered interest rates , depreciation of the Rupee and asset price inflation to follow. And perhaps a stock market crash arising from the collapse of these companies and/or the entities that lent to or were vendors to these companies.