There is strong evidence emerging that Indian corporates have learned their lessons from the global financial crisis very well. In the post Covid global risk rally, they have avoided most of the mistakes they made during the exuberant years of 2003-2008, and have emerged stronger.
In pre-GFC buoyancy companies like Tata Steel (Corus), Tata Tea (Tetley), Tata Motors (JLR), Indian Hotels (Orient Express), Havells (Phillips), Sun Pharma (Taro), Suzlon (Hensen), Hindalco (Novelis), Reliance Telecom (Flag), etc. got lured by cheap debt and bought global businesses (in some cases bigger than their India operations), paying top dollars. Most of these acquisitions inflicted severe pain to the parent entities in the ensuing years.
This time, despite near zero rates and abundant liquidity, they have been very careful in acquiring businesses abroad. IT services companies have some niche small sized acquisitions to augment their resource pool. These acquisitions have been mostly earnings accretive almost immediately.
Indian companies have (a) continued to deleverage despite raising their capex; (b) managed their cashflows well; and (c) rationalized their operational expenses especially wages well to raise larger resources through internal accruals.
Lower dividend payout: As per a recent latest ET report, in FY24 the Indian companies curtailed their dividend payout to the lowest in nine years. As the capacity utilization increased above the long-term average, companies reserved more money for capital expenditure. FY24 dividend payout ratio was 34% (including buybacks 38%), down from 43% in FY23 and 37% in FY22.
Leverage trending lower: As per India Ratings, net leverage of
top 250 companies (excluding BFSI) has trended lower in the post-Covid period. The
net leverage of about 3100 other listed companies has not changed much from the
long-term trends.
Indian companies have done modular capex in the past five years. Due to a calibrated approach adopted in capital expenditure, in the majority of cases cash generated from operations has been sufficient to meet the capital expenditure.
Despite the consensus expecting lower rates and a weaker USD, Indian companies are not rushing to raise money through ECBs. Peter Guenthardt, head of Asia Pacific global corporate & investment banking at Bank of America, recently commented, “After having deleveraged their books, Indian corporates are likely to go slow on overseas dollar loans as current rates are expensive, although there is "huge pent-up demand" for buying into local firms' equity”. (see here)
In the FY23 net ECB flows into India were just US$1bn and in FY24 it was US$9.5bn. Though, in FY24, registrations for ECBs with RBI surged to the highest in four years.
More importantly, learning from the mistakes made in the pre-GFC euphoria, more than 70% of ECBs raised in FY24 were effectively hedged in terms of explicit hedging, rupee denominated loans or loans from foreign parents, limiting the impact of external shocks, according to an article called ‘State of the Economy’ in RBI’s May bulletin.
This prudence augurs very well for the Indian companies and markets, as it makes the growth sustainable, predictable, and profitable.
