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As interest rates are rapidly going up through the roof, the burden of servicing debt is increasing on companies. It’s a no-brainer that businesses with gigantic amounts of debt would be facing a stressful period in the coming months as compared to the ones that are less leveraged.
Some capital-intensive sectors such as real estate, manufacturing sector, etc. cannot function without debt and would likely be facing the strongest heat. If you are looking to construct a portfolio for a minimum of 3 years, then you much take the debt burden on the management into consideration. Here are 3 companies that have the highest debt, as of the FY22 balance sheet.
Note: A high debt does not necessarily make a company a bad option over peers with a lesser debt.
Housing Development (NS:) and Finance Corporation Limited
Housing Development Finance Corporation Ltd (NS:) is in the business of housing finance and therefore it’s no surprise that the company has a total debt of around INR 5,07,459 crores. That’s more than the total market capitalization of the company, which is around INR 4,83,449 crores.
Some might say it’s a fundamentally strong company and therefore no issues in holding it in the portfolio, and that could be a valid statement. However, looking at the past 5-year return for the stock, it’s a mere 59%! That’s a total return, not CAGR! Also, the stock seems fairly valued with a P/B ratio of 2.51, compared to the industry’s average of 2.32.
Reliance Industries
The next one on the list is the largest listed company in India, Reliance Industries Ltd (NS:), having a market capitalization of INR 17,78,090 crores. The total debt in the books was recorded at INR 3,19,158 crores in FY22 while the interest coverage ratio of the company stands at 6.77. This ratio is used to determine a company’s ability to meet its interest obligations.
The higher the ratio, the better the company’s financial position is w.r.t to meeting its interest. Although the current debt seems to be not a big issue for the company as its earnings are sufficient to take care of the debt, interest rates have rapidly gone up after March 2022, which would definitely slice a pie off its profits.
NTPC Limited
The last stock on the list is NTPC Ltd (NS:) which is a INR 1,65,140 crores big power generation company and also has some other related businesses such as consultancy, project management, etc. The company recorded a debt of around INR 2,10,706 crores in FY22, which is roughly 21% higher than its market cap.
The interest coverage ratio of the company is 3.35 which means its FY22 EBIT was 3.35x higher than the interest payment on the debt.
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