Stock Investors Prize Companies With Less Debt in India Lockdown
A basket of equities with highest credit quality has outperformed those with the lowest by about 30 percentage points this year
(Bloomberg) -- Stock investors are rewarding Indian companies with a smaller debt load as solvency has increasingly become a worry in an economy under the world’s largest lockdown.
A basket of Indian equities with the highest credit quality has outperformed those with the lowest by about 30 percentage points this year, according to a Bloomberg measure based on factors including debt levels and cash flows. The divergence in performance widened as fear about the coronavirus outbreak increased in March.
The all-but-certain recession for India in the coming months is forcing stock buyers to think like credit investors, focusing on firms with solid cash buffers to survive the public health crisis. Tracking investor behaviors elsewhere in the world, they are willing to pay a premium for those that have lower debt burdens, or are able to sustain their growth from internal cash.
Brijesh Ved, head of equities at BNP Paribas Asset Management India, said he’s evaluating companies’ ability to repay debt more stringently in the current environment and that his team is running “stress case scenarios across sectors.” Sachin Shah, a fund manager at Emkay Investment Managers Ltd., is using a proprietary model that quantifies corporate governance as well as financial data to identify companies with balance-sheet strength, meaning zero or low debt.
Among the companies listed on the NSE Nifty 50 Index, food-to-apparel conglomerate ITC Ltd. has the most amount of cash relative to its short-term debt. Its shares have declined 4% since March, compared with a 21% plunge in the benchmark. Chemical producer Grasim Industries Ltd. is among the ones with the worst ability to service debt, and has slumped 21% over the period.
For now, many investors are finding shelter in stocks of Indian software service providers, which not only are less connected to the domestic economy, but also are relatively cash-rich and well-placed to meet near-term obligations. Companies in more cyclical sectors whose performance tends to follow the trajectory of economic growth, such as banking, energy and metals, have suffered. The Nifty 50 index rose 2.9% on Friday, taking gains from a March 23 low to more than 20% and entering a technical bull market.
“Once things gradually begin to stabilize, and we start heading towards the recovery phase, the move towards cyclical businesses could come back,” said BNP Paribas’ Ved.
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