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Debt drain

A few companies have managed to overcome their leverage blues

Illustration: Kishore Das

Borrowing from the future can be a tricky decision, especially when you have no way to tell which way the tide will turn. In the financial markets, debt financing is one such double-edged sword that can hit investors hard during downturns but can equally become beneficial during a recovery. Today, this sword has turned in favour of those who have attempted or managed to beat the debt trap. Though most companies are still struggling, some of them have been able to emerge out of the current crisis, partly thanks to asset monetisation, industry recovery and some key financial measures. So, what does this mean for investors? Well, if successful, some of these companies will actually be able to offer huge opportunities to investors, as lower debt and interest costs will not only have a positive rub-off on earnings but could also mean huge gains through valuations rerating. Currently, most such companies show depressed earnings because of the negative impact of leveraging in terms of interest costs, creating a vicious cycle where investors currently are afraid of taking a chance on the stocks given the amount of debt on the books, thereby impacting valuations. 

Making a strong comeback

Delivering has also translated into better return ratios for the four companies

“Most investors value these companies based solely on their enterprise value, which is a measure of debt plus equity. Reducing the debt or eliminating it altogether will be a good sign for equity shareholders as valuations will then start to tilt in their favour,” says Saurabh Mukherjea of Ambit Capital. But emerging out of debt is not that simple, offers Nirmal Gangwal, founder and MD, Brescon Corporate Advisors. “There are very few companies that have been able to come out of the debt trap. Those who have done well have managed to stay away from debt since, despite the concerns of the banking system. Though this could be a good sign for equity shareholders, they need to be vigilant while evaluating such turnaround cases and confirm whether the companies have a reasonably liquidity position. They also need to keep a close watch on the industry scenario and the business environment as these factor

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