Over the last 8 years, BSE Sensex has delivered a return of ~ 24% (i.e. from 21,206 in January 2008 to 26,392 on 28 January 2015). Yes, since 2008 (pre-crash levels), bench-marked Indian stocks have risen by approximately 24%.

 

8 years for a meager 24% return is disappointing to say the least. Even a simple fixed deposit in a bank would have delivered 100% return during the same time (considering 9% interest rate compounded quarterly). Most of this 24% return came in the past 16 months, i.e. since April 2014. As everything seemed like it was getting back on track for equities, there started worries of slowdown in China and the U.S. markets peaking. Europe of course has not started showing any improvement in production. To make matters worse, Middle East has started withdrawing funds from around the world due to softening of crude prices.

With a rather gloomy picture being projected by most analysts, we decided to do some analysis of Nifty companies to compare them on 3 parameters: (1) Market capitalization; (2) Debt and (3) Earnings growth, based on metrics from 2008 and 2015.

Market Capitalization

Data in the table below compares the current market capitalization of the constituent companies of the CNX Nifty 50 Companies with their market capitalization on 1 January 2008  (excluding banking companies and HDFC).

Note: Companies marked in red indicate those where current market capitalization is less than current debt.

Company	FY 2008 (In Rs. Cr.)	FY 2015 (In Rs. Cr.)	% Change
TCS	1,03,192	5,03,520	388%
Reliance Ind	4,61,007	2,82,132	(39%)
ITC	87,295	2,62,807	201%
Infosys	1,00,475	2,55,122	154%
Coal India	2,16,241	2,25,747	4%
Sun Pharma	28,844	2,12,963	638%
ONGC	2,67,256	2,08,369	(22%)
Hindustan Unilever	47,194	1,85,421	293%
Larsen & Toubro	1,29,224	1,50,459	16%
Bharti Airtel	1,93,386	1,44,806	(25%)
Wipro	76,401	1,39,054	82%
HCL Tech	22,728	1,33,581	488%
Maruti Suzuki	29,959	1,27,115	324%
Tata Motors	47,926	1,15,588	141%
NTPC	2,11,744	1,00,265	(53%)
Lupin	5,626	83,837	1390%
Asian Paints	10,899	82,136	654%
UltraTech Cement	27,214	80,807	197%
MNM	26,858	76,565	185%
Bosch	15,997	74,283	364%
Power Grid Corp	12,307	71,271	479%
Dr. Reddy’s Lab	76,669	70,417	(8%)
BPCL	8,746	65,663	651%
Bajaj Auto	18,793	62,250	231%
BHEL	1,26,514	57,421	(55%)
Idea Cellular	49,248	55,330	12%
Cipla	16,998	52,985	212%
Tech Mahindra	27,381	49,641	81%
Hero MotoCorp	13,944	47,944	244%
NMDC	1,91,817	39,925	(79%)
Zee Entertainment	15,516	37,169	140%
GAIL (India)	45,890	36,760	(20%)
Ambuja Cements	23,038	31,985	39%
Grasim Ind	34,559	31,892	(8%)
Vedanta	32,801	28,565	(13%)
Cairn India	46,478	27,232	(41%)
ACC	19,453	25,730	32%
Tata Steel	90,634	22,192	(76%)
Hindalco	40,383	16,881	(58%)
Tata Power	40,437	16,512	(59%)
Total	3,041,072	4,292,342	41%

Data in the table below compares the current total debt of the constituent companies of the CNX Nifty 50 Companies with their debt position in FY 2008  (excludes banking companies and HDFC).

DEBT

Company	FY 2008 (In Rs. Cr.)	FY 2015 (In Rs. Cr.)	% Change
Reliance Ind	50,696	1,48,742	193%
NTPC	31,944	94,003	194%
Larsen & Toubro	12,316	82,267	568%
Power Grid Corp	22,263	80,472	261%
Vedanta	0	71,966	–
Tata Steel	18,022	71,579	297%
Tata Motors	11,585	69,211	497%
Hindalco	32,352	67,058	107%
Bharti Airtel	9,602	66,367	591%
ONGC	944	45,588	4729%
Tata Power	9,203	38,713	321%
BPCL	15,100	32,799	117%
Idea Cellular	6,515	18,776	188%
GAIL (India)	3,785	15,927	321%
Grasim Ind	5,577	9,142	64%
Wipro	4,485	7,715	72%
UltraTech Cement	1,741	7,557	334%
BHEL	167	4,621	2667%
Dr. Reddy’s Lab	1,968	3,617	84%
MNM	10,357	2,620	(75%)
Sun Pharma	144	2,489	1628%
Cipla	581	1,702	193%
Tech Mahindra	30	675	2149%
Lupin	1,203	471	(61%)
Asian Paints	258	410	59%
HCL Tech	55	406	639%
Coal India	1,884	402	(79%)
Maruti Suzuki	900	331	(63%)
TCS	455	300	(34%)
ITC	225	256	14%
Bajaj Auto	1,346	112	(92%)
Hero MotoCorp	132	100	(24%)
Bosch	264	56	(79%)
Hindustan Unilever	434	43	(90%)
Ambuja Cements	289	22	(92%)
Zee Entertainment	387	1	(100%)
ACC	482	0	(100%)
Cairn India	4,356	0	(100%)
NMDC	0	0	NA
Infosys	0	0	NA
Total	2,62,047	9,46,514	261%

Sector Breakup: Growth in Market Capitalization and Debt 

Result of Analysis

1. While market capitalization has increased 1.41 times from 2008; debt has risen by 3.61 times.
2. While share prices have not increased during the 8 year period under analysis, companies have continued spending on capacity expansion.
3. Debt has grown 2.5 times compared to market capitalization, indicating that companies are adding capacities in anticipation of rising demand. This is a pattern seen repeatedly before both – major bull and bear phases in past.
4. Capital expenditure has been funded by debt more than equity primarily because of lack of interest in equities.
5. When we looked beyond the Nifty 50 companies – many companies had interests covers below 1, indicating that they are not making enough profits to pay interest costs on their debt. Over the next 8-16 quarters, some companies out of the BSE500 will be declared bankrupt.

Also see: Interest Coverage Ratio

Earnings Growth for Nifty Companies

Net Profit

Company	FY 2008  (In Rs. Cr.)	FY 2015 (In Rs. Cr.)	% Change
Reliance Ind	19,523	23,640	21%
TCS	5,060	20,060	296%
ONGC	20,221	18,334	(9%)
Tata Motors	2,235	14,060	529%
Coal India	5,243	13,727	162%
Infosys	4,659	12,373	166%
NTPC	7,470	9,992	34%
ITC	3,178	9,766	207%
Wipro	3,252	8,714	168%
HCL Tech	1,054	6,508	517%
NMDC	3,251	6,422	98%
Bharti Airtel	6,495	5,308	(18%)
Power Grid Corp	1,448	5,046	248%
Larsen & Toubro	2,258	4,934	119%
BPCL	1,913	4,807	151%
Sun Pharma	1,551	4,541	193%
Cairn India	803	4,480	458%
Hindustan Unilever	2,510	4,376	74%
Maruti Suzuki	1,790	3,791	112%
Idea Cellular	1,042	3,193	206%
GAIL (India)	2,761	3,071	11%
Bajaj Auto	726	2,812	287%
MNM	1,845	2,593	41%
Lupin	408	2,444	499%
Grasim Ind	3,346	2,427	(27%)
Hero MotoCorp	968	2,349	143%
Dr. Reddy’s Lab	437	2,336	435%
Tech Mahindra	326	2,256	592%
UltraTech Cement	1,012	2,102	108%
Ambuja Cements	1,390	1,487	7%
BHEL	3,115	1,450	(53%)
Asian Paints	428	1,427	233%
Bosch	634	1,338	111%
Cipla	701	1,254	79%
ACC	1,100	1,151	5%
Zee Entertainment	416	976	135%
Tata Power	1,177	409	(65%)
Hindalco	2,624	84	(97%)
Tata Steel	12,322	(3,956)	(132%)
Vedanta	1,549	(11,373)	(834%)
Total	1,32,241	2,00,709	52%

Corporate earnings for Nifty companies has grown only 1.5 times over the past 8 years, resulting in lack of interest in equities. While lack of interest was to be blamed for not buying into Indian stocks until April 2014 when price to earnings ratio of Nifty was at 18.91, today the situation is vastly different with the Nifty PE ratio at 22.17 (as of 31st August 2015).

Since April 2014, while stock prices are constantly rising, corporate earnings have been falling consistently, that’s a fall for 4 straight quarters.

Also See: Nifty Results Analysis Q1 – 2016

The last time we witnessed negative earnings growth in 4 consecutive quarters before Q1 of 2016 was way back in Q2 of 2010.

Key Takeaways

• Companies within the Nifty basket with manageable debt levels will continue to generate higher returns.
• While many mid- small cap companies are struggling with high debt burden, most buying opportunities also exist in this space. Stocks outside of the BSE 500 are available at significantly discounted value. 
• Big data points to look out for – Industrial production, VISIBLE IMPROVEMENT IN CORPORATE EARNINGS IS NEEDED for balance of FY 2016.
  
• Higher proportion of debt compared to equity is good only when companies are able to consistently earn profits higher than their interest costs. This is not the situation for most companies with high levels of debt.Also See: How higher debt helps profitability
• STAY AWAY FROM COMPANIES WITH HIGH DEBT. When the economy picks up, companies which have relied less on debt funding are likely to benefit more than their debt binging counterparts who will spend most of their (potential) future earnings on servicing their interest costs. This is particularly true given that an economic recovery is most likely to happen at a very slow pace. The chart below displays the interest coverage ratio for BSE 200 Companies (excludes banking and financial service companies).

Average Interest Cover for BSE 200 Companies

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