NEW DELHI: Construction and textile sectors are leading India Inc’s deleveraging drive, as companies from these sectors have managed to reduce loads significantly over the past couple of years. On the other hand, telecom and realty firms saw their leverage levels go up during the same period.

(SEE CHART) In FY17, 145 BSE500 index companies had a debt-to-equity ratio in excess of one, while 73 had it above two and 30 in excess of five, data compiled from corporate database Capitaline showed. The ratio reflects the level of debt that a company is raising to finance its assets relative to the value represented in shareholder. The ratio varies from sector to sector. Aggregate debt-equity ratio of BSE500 companies (ex-banks) moderated to 84 per cent in FY17 from an average of 93 per cent during FY14-FY16, Nomura India said in a note. Among the sectors with highest leverage, the sharpest deleveraging (reduction in debt-equity ratio) happened in construction (about 58 percentage points fall since FY14-FY16) and textile (20 percentage points fall) sectors, while telecom (28 percentage points rise), realty (39 percentage points rise), metals (11 percentage points rise) and power (11 percentage points rise) sectors saw leverage levels go up, despite their already high debt levels, the brokerage noted. One percentage point (PP) equals 100 basis points. Among the less-leveraged sectors, debt-equity ratios of the capital goods (41 pp), (21 pp) and (11 pp) sectors moderated the most.

A slow process of deleveraging has started, although much more needs to be done. The recent recapitalisation of public sector banks (PSB) should nudge this process forward, as non-performing asset resolution in many cases would require right-sizing of debt of these leveraged companies, a process that will now be possible with the capital provided to the PSBs. Over time, this should set the stage for capex revival, said Nomura India.

By and large, the financial sector stands out when comparing debt-to-equity ratios. Certain industries, however - especially those that are highly capital intensive, such as the industrial goods sector - utilize debt as common practice. Among them are aerospace and defense, as well as those that include manufacturers of general building materials and farm and construction machinery. As of 2018, the aerospace industry has a debt-to-equity ratio of 16.97 and the construction materials sector average is 30.90.

Debt Equity Ratio Indian Companies Camtasia For Mac

Financial Sector. The finance sector's average debt-to-equity ratio on the day before the date of publication was an eye-popping 1030.23. A huge disparity between debt and equity for financial companies compared to other industries is not a cause for concern. Remember, a financial company such as a bank borrows money at a lower rate and lends the money at a higher rate, making a profit on the spread between the two. Therefore, simply using debt to equity as a measurement of financial risk for a bank or other financial institution is misleading. Capital Requirements. Any financial institution - particularly a bank - that is not adequately capitalized can cause trouble for the economy as a whole.

That is why banks, insurance companies and other commercial lenders face stiff regulations. Some of the terms you'll hear when discussion turns to the soundness of a financial institution are 'Tier 1 capital,' 'Tier 2 capital' and 'reserves.' These are the metrics that regulators and investors use to evaluate banks rather than simply focusing on debt-to-equity ratios. In essence, a bank must maintain certain minimum capital requirements and reserves as a cushion against loan losses. A high debt-to-equity ratio - no matter the industry - places a company in a precarious position. Several missed interest payments could spell financial ruin for the company, which is why investors focus on the ratio. It is a good practice to compare companies within an industry to spot a company with an above-average debt-to-equity ratio.

That ratio, however, tells only part of the story. It's not uncommon for a company to issue bonds rather than sell additional shares because of the lower cost of debt, as interest payments are tax deductible. Issuing additional shares also dilutes the fractional ownership of shareholders. What matters is whether the company invests the proceeds from its borrowing into projects that generate a return above its cost of capital.