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Revealed
India's Third Giant Leap

This Could be One of the Biggest Opportunities for Investors




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Could this bring down Indian economy?
Fri, 21 Feb Pre-Open

The third-quarter earnings season has ended on a positive note. The net profit of 30 Sensex companies has increased 24% compared to last year. Sequentially, too, these companies have grown their earnings by 14%. A large part of the good earnings cheer has been driven by export sectors such as pharmaceuticals and IT. Nonetheless, the earnings revival is more broad-based in the December quarter than earlier.

An improvement in recovery suggests a positive scenario on the demand side. But, what could derail this and put India in a crisis is the highly leveraged overleveraged corporate sector, as suggested by an article in Livemint. While not all companies forming part of India Inc. have too much debt on their books, once again companies belonging to sectors such as telecom, power, construction and infrastructure are highly leveraged.

According to the latest review of the economy by the Reserve Bank of India, the ratio of short-term debt to total external debt still stands at around 42% which is an alarming situation

In an effort to improve the country's woeful infrastructure, India Inc. has pumped billions of dollars into new power plants, roads, rail lines and airports over the past decade. The investment was largely financed with foreign-denominated debt, a choice that seemed reasonable enough as recently as 2010, when the Indian economy expanded by 9.3% in real terms and the rupee remained relatively strong. But it doesn't seem so reasonable anymore.

Over the past three years, the value of the rupee has fallen to historic lows against the dollar, and several of the large corporations that borrowed heavily to finance those much-needed projects are now struggling to pay the interest on that debt.

India Inc.'s debt binge has exceeded limits and is quite a threat for Indian economy.. No doubt these companies will have to improve operational efficiencies and cash flows if this debt has to be brought down. Otherwise, massive debt will only dent profits owing to higher interest costs with little left to pump into capital investments.

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