Raising capital under extremely adverse circumstances is truly a great accomplishment. The bigger Indian corporations have shown remarkable chutzpah in raising big monies during the COVID crisis. These monies are largely being used to deleverage their bloated debt. Clearly, India’s big businesses see leverage as a grave risk and are in a hurry to raise huge sums of money.
While deleveraging is definitely a good thing, it comes with a consequence. The sale of their existing assets increases the equity side of the balance sheets of corporate India. Now, they need to grow even more to produce decent return metrics on a significantly bigger net worth. Given the already weak return metrics of Indian business, the current raising of capital will only put further pressure on return metrics.
The key thing for corporate India to achieve is clear. They need enormous business traction and operating leverage to kick in swiftly. Given economic ground realities, this is hardly going to be easy. The best case, for now, is that Indian big business have bought themselves insurance for the tough times ahead. But, navigating the road to better days is certainly not going to be easy.
India needs to regain lost GDP before it returns to growth. Companies which raised capital are going to see their balance sheets weighed down by their profit statements. Only when the profit statements regain lost momentum, valuations can take further wings. For now, sentiment and liquidity seem to make us almost believe return metrics may after all not matter. Investing must now be more responsible than ever.