Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Fixed Income

Crazy Debt Levels and Falling Stock Prices – A Double Whammy For Lenders

In a very smart piece, Value Research shows us how crazy our debt levels have gone. Here’s a good list:  (Thanks @b50)

image

Lanco, for instance, is run by a politician, and has debt levels of 36,000 cr. If you sold all the shares of the company in the market today, you’ll get less than Rs. 1,200 cr. In fact, make that 1,100 cr. because the stock fell another 7% today. Probably someone tried.

image

This is not a good story but its what repeats in every single of the stocks above. Big debt, promoter pledging, and boom, we have a massive fall in the stock. Bhushan Steel (all you want to know about it) is in such a deep hole no one really knows what to do – they now have over Rs. 38,000 cr. in debt, and are valuing the coal blocks, where allocations to them have been cancelled, at cost because they believe they will be paid back. If that assumption changes, the company is instantly in “dead” territory from the current “mortally wounded”.

What happens if these loans can’t be recovered? Much of these loans are not market borrowings, they are regular loans from banks. The banks give money from our deposits, and that becomes a systemic concern. While a little bit of debt is a good thing, what appears to me as a significant problem is when the debt is so large a company can barely make its interest payments from operating cash flow.

See Suzlon’s latest quarter. They make a loss on an operating basis (that is, before interest has to be paid) of about 33 cr. while interest itself is Rs. 55 cr. – and the only reason their loans aren’t such a big problem is that they are held by foreign institutions, not Indian.

It’s going to be fun to see which companies have the highest  pledged shares and which of those have fallen the most in recent times….

  • Adi says:

    This reminds of the case of Global Telesystems Ltd (GTL) which was trading around Rs 400 in mid-2011, and crashed to Rs 30 levels in a couple of months. It is now trading around Rs 10.
    One of my friends who worked there had stock options and vested stock of the company. He also pledged his GTL stock in loan-against-shares scheme to purchase property – and it turned out to be a nightmare for him.
    When the price came crashing the first thing he did was to buy more – thinking (and perhaps believing the management) that there is nothing wrong with the company. It came crashing from 400 to 300, to 200, then to 100 levels, and stabilized around Rs 35.
    His loan-against-shares account was wiped out, the newly purchased stocks worthless, had to sell the property at a distressed price, stock options worthless, job insecurity and extreme stress in personal and professional life.

    • Leo says:

      this is a lessson to be learnt.Samething is going ot happen to sensex. WE are in a monster credit bubble .Dont lever on stocks only 30% cash 30% gold 30% land 10% may be investment in bonds or stocks

  • shedole says:

    Would like to know how banks can give such huge amounts as loans to these companies when networth is so small and these companies taking nearly ten times of their networth.My feeling is for common man to get rs 20,000 he is made to run from pillar to post but these biggies get loans as if they are heaven fallen.One more thing banks when giving loan to individuals, so concerned about his capacity earn and pay and don’t they apply this simple logic to these companies.

  • Vineet says:

    How do I get a list of all companies that are above the ratio of 1 (Debt/Market Cap) ? Do you offer it as part of your premium services ?

  • Gaurav says:

    Lanco Infra has pledged promoter shares at something like 90% of promoter holdings! GMR comes in at over 25%… (just did a quick screen). You could add a new section to your site, call it “The Walking Dead Portfolio”… 🙂

  • Getafix says:

    The situation is the same at the SME level all across the country.
    I know of several businesses in the small town where I am based, having turnovers of a few Crore rupees, and at times net worth which is even negative, with loans of up to 200 Crores.
    Most of these loans/credit limits were obtained with the connivance of bank officers, with CAs as conduits, against extremely questionable collateral in the form of inflated real estate. Standards rates of commissions vary between 3-5% of the total.
    Most, if not all of these funds have been used by these “businessmen” to make investments in local and NCR real estate, and then re-pledged as collateral to obtain further loans.
    If RE prices dip any further than they already have, and the banks start to make margin calls, this country will see a collapse which will make the 2008 crisis in the US seem like a picnic.Except, none of this will be allowed to happen. The interesting part will be, how the government at the center plans to avoid this apocalypse.

    • I don’t think the government has the room to avoid this. It’s a big bubble. Banks will hurt.

      • Ramki says:

        Remember reading somewhere recently that RBI has a large suplus in its Balance sheet and Government can suck part of it to recap some PSU Banks and/or give shares to RBI . And a PSU like NMDC with lot of cash can temporarily rescue some small PSU Banks. Or even EPFO money . All these are possiblities. So some money is there. But real question is – Is this government even interested in rescuing failed/failing PSU Banks?

  • Ramki says:

    That there is a huge NPA hangover on Indian Banking (mostly PSU banking) industry is obvious. Question is how will things move from here?
    Pretty Clear Banks are using falling rates to lower cost of deposits and use the margins to make up for all the losses due to good loans turned bad. Yes it will work for some time. The one problem I see is this : What if decently rated corporates start accessing Domestic Debt Based savings directly (company deposits etc) and raise enough money to entirely repay high cost borrowings from Banks?
    Right now it is not happening, but does it mean it wont happen for ever? And if this turns to be a flood, banks will not see any deposit growth and problem repeats. But again if objective is to destroy corrupt weak PSU Banks, should we even worry? I am confused !

  • kumar says:

    i think the root cause of all this is the senseless over-leveraging that many participants in the so-called ‘economic system’ have indulged in, with no consideration of the value of the underlying assets that were pledged [assuming that they will always go up in value, and if not, the government of the day will act as as [‘savior of last resort’]].
    Now that the crap is finally hitting the fan, those that can, are maximizing this leverage business, and leave the rest of us with handling the aftermath of the collapse, which is bound to come, sooner than later.
    take the case of vijay mallya. the banks have no expertise in business that he runs, heck, he himself has no expertise. he just chases the latest fad, with the idea of selling it to the next moronic buyer, and when he can’t find one, saddles the public sector banks with the burden. in the meantime, he lives lavishly, sure of the fact that none can get to his personal assets.
    i see no reason for hope for the next generation that inherits this mess. i am generally realistic, but the current system gives me no reason to be optimistic at all.

  • kumar says:

    and this idea of giving 51% control over companies [to banks] that skip out on repayment of loans?
    what really stops the company management [old] from walking away entirely, thus burdening the bank with the entire liability, both to itself, and other lenders?
    banks have hardly any expertise in running any sort of businesses full time. and with no bailout money from the centre, where is the reason to believe that this plan will achieve success of any sort?
    it might be my eyes, but i cannot see any reason how [or why ] this can be a model for success.

    • Yeah, this is some crazy proposal but I think it empoowers banks only. I doubt banks will want to do that so they’ll get more proactive, or they will have to run these companies 😉 Or fidn buyers. That is not a bad thing because finding a buyer, even at a low price, is a good thing as then the loan is no longer in limbo.

      • AJ says:

        It is not all that bad an option. Rather than stick around with NPAs for eternity, Banks can actually bite the bullet, take over the company and find a Private Equity buyer.
        Agreed they may eventually get only 30 paise for every Rupee, but still would be worth it.

  • kumar says:

    This debt level is not the only problem haunting lanco. they have a real-estate project in hyderabad, named lanco hills. Amongst other problems, the land on which this project is built is now being claimed to be waqf land.
    which means the current owners are staring at a big problem, if the case goes in favour of the waqf board.
    there are many other companies that are part of this lawsuit [the land being claimed is not just for this one company, other tech big names are also mentioned, and there is one big management school etc], estimate of compensation being seeked [by the waqf board] is about Rs 32,000 cr.
    Here is a link to a newspaper article mentioning the names : http://www.deccanchronicle.com/150530/nation-current-affairs/article/wakf-board-claims-rs-32-thousand-crore-compensation
    all i can see in such a scenario is unlimited and unending conflict.