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 SeeNifty 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