How India Inc’s balance sheets fared in 2022

Borrowing More

Indian companieshad gone on a deleveraging spree during the pandemic, with debt declining 3.7% and 1.9% in the first half of 2020-21 and 2021-22, respectively. But the trend has reversed. The aggregate debt of the sample of companies covered in the analysis jumped nearly 10% between 31 March and 30 September to ₹25.2 trillion. This is up 45% since the pre-pandemic level.

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Corporate borrowings had started inching up the last fiscal itself, when it grew 3.1% between October 2021 and March 2022. Overall, 52% of the companies in the sample saw a rise in their borrowings in the last one year, while 45% borrowed more in the last six months.

Public listed firms were borrowing more aggressively: their gross debt rose sharply by 24% while private entities saw a 9% increase over one year. However, experts don’t see the pace of growth in leverage as a big enough worry.

Pale Investments

But Thebig cause for concern is that India Inc. is still turning a deaf ear to the government’s call to unleash animal spirits. The rise in borrowings has not seen a commensurate growth in fixed assets, a proxy for capital expenditure.

Net fixed assets of the companies in the sample grew 2.2% between 31 March and 30 September, marginally quicker than the 1.6% growth in the preceding six-month period. However, this pales against the pre-pandemic levels.

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Investments may revive gradually as India is better placed than many other economies going into 2023. Also, global companies are diversifying their supply chains and manufacturing bases. “This coupled with the fact that India is a domestic consumption-driven economy, companies feeding on this should undoubtedly unleash its animal spirits and get into an expansionary phase with capital expenditure spends,” said Sandeep Nayak, chief executive officer, Centrum Broking.

Pressures of 2022

Then, whyare corporates raising funds, if not to invest in projects? Analysts say it’s to fund their working capital needs, which had increased sharply in the first half of 2022-23 due to the spike in commodity prices due to the Russia-Ukraine war. A build-up of higher inventories to capitalize on the festive demand later in the year also raised the requirement.

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Sector-wise net-debt-to-equity ratios capture this burden. For segments such as metals and mining, the ratio went up from 12.2 to 15.7 between 31 March and 30 September, the analysis shows. “Debt in metals and mining companies went up mainly after the Ukraine war as coking coal prices went up sharply and after the increase in export duty on steel by the government,” said Ashutosh Tiwari, managing director (research), Equirus.

Declining Reserves

Not justborrowings, companies are also dipping into their cash reserves to meet their growing needs. The combined cash and bank balance of the sample of companies declined 2.4% in the first six months of 2022-23 to ₹3.5 trillion. In the preceding six-month period, the cash and bank balance had increased 12%. On a year-on-year basis as well, cash reserves growth slowed to 9.3% as of 30 September against 11.3% rise as of 31 March.

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“Working capital increase and margin compression due to increased commodity prices has impacted cash generation,” Tiwari said. However, he was hopeful that cash flows would improve in H2FY23 as margins are expected to improve with a decline in commodity prices and working capital would also ease.

Around 48% of the companies in the sample saw a decline in their cash and bank balance in the first six months of the current fiscal. Across sectors, the infrastructure and engineering and hospitality segments saw a depletion of above 25%.

Illusive Growth

Even thoughcompanies continue to shy away from building new capacity, the overall macroeconomic data doesn’t capture this trend enough. The recently-published GDP print showed that nominal gross fixed capital formation has been growing healthily: 17% year-on-year in the quarter ended September, and 24% in the April-September period. This was primarily on account of major heavy-lifting by the government to stoke demand. New project proposals remained muted in the September quarter but rate of completion of projects inched upwards. The value of projects being completed jumped 13.1% sequentially, driven by a massive 88% jump for public sector projects, even as private sector completions declined 43%.

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As we move into the new year, India will have factors going well for it that could aid capital expenditure growth again. A cyclical pick-up in real estate, the government’s focus on roads and railways, and localization of imports aided by production-linked incentives is expected to benefit Indian manufacturing growth, Tiwari noted.