6 highly leveraged stocks
In financial terms, leverage refers to the ratio of a company’s borrowed capital (debt) to the value of its common stock (equity).
While highly leveraged companies are tempting bets because they trade at high betas, meaning they tend to rise when stocks rise, the flip side is that they also fall more when stocks rise. stock prices are falling.
Let’s take a look at the highly leveraged stocks in the BSE 500 index.
# 1 Adani Power
Adani Power’s share price tops the list of highly leveraged stocks.
The company has a total debt of ??650,263m in March 2021. His net worth during the same period was ??4,976 m.
By dividing the total debt by the net worth, we get debt / equity ratio (D / E) from 131.
Compared to other companies in the Adani group, Adani Power is struggling with huge debt.
During fiscal year 2020, it suffered losses of ??22,748m due to the high cost of fuel, coupled with the lower rupee and high interest costs. This year however, the company was back in the dark, posting profits of ??12,700 m.
Adani Power is the only share of the Adani group to have opted for voluntary delisting.
With the growth of companies, the debt of the Adani group has also increased. In addition, the Adani group has a lot of planned capital spending ahead which would only get into more debt.
As the Adani group, led by the second richest Indian, Gautam Adani, helps build the nation, its growing debt appears to be beyond the comfort zone.
This has led many brokerage firms not to initiate hedging on these stocks.
The strategies adopted by the richest Indian, Mukesh Ambani, and the second richest were a story of contrasts. When Reliance Industries undertook a deleveraging exercise to achieve zero net debt status, the Adani Group embarked on a wave of debt-fueled expansion.
# 2 Tata Communications
Tata Communication’s total debt amounts to ??99,585m as of March 31, 2021. During the same period, its total shareholders’ equity amounted to ??1,155 m.
Now dividing its total debt by total equity would give us a D / E ratio of 86.
In fiscal year 2021, both the result and the cash flow of the Tata group company improved.
Thanks to strong cash flow generation, the company was able to reduce its debt. Yet he has high debt.
Tata Communication’s net income for the 2021 financial year amounts to ??12,537 m, the highest for 11 years. This also compares to a loss of ??870 m in fiscal year 2020.
# 3 Mahindra Holidays & Resorts
As of March 2021, Mahindra Holidays’ total debt stood at ??9,393 m. While debt is relatively low, his net worth is also low at ??847 m.
This gives a D / E ratio of 11.
Recently, Mahindra Holidays & Resorts India insider Akhila Balachandar sold ??3.1 million of its shares for ??306 each. It represented 100% of its stake.
Mahindra Holidays & Resorts, part of the Leisure and Hospitality business of the Mahindra Group, offers family vacations primarily through vacation ownership memberships. Launched in 1996, the company’s flagship brand, “Club Mahindra”, has more than 250,000 members.
# 4 Adani’s green energy
It’s no surprise that another company in the Adani Group is on the list of highly leveraged companies.
Adani Green Energy’s total debt in March 2021 amounts to ??238,740 m.
His net worth during the same period is ??22,000 m.
Dividing his total debt by net worth yields a D / E ratio of 11.
In March 2021, Adani Green had raised $ 1.35 billion in debt for its renewable energy projects under construction through definitive agreements signed with a group of twelve international lenders.
Investors seem confident about the Adani group. They believe that companies will be able to make repayments accordingly.
But here’s the concern. Investors also had confidence in Reliance Power and Reliance Infra in 2015 and 2016. They had similar debt measures and enjoyed market confidence. Yet they derailed when the Reliance Communication group company collapsed.
Another concern is that the sectors in which the Adani group is expanding (airports and data centers) are high leverage companies where the story is not encouraging.
The GMR and GVK groups, which won valuable airport privatization contracts in 2005, have not recovered from their debt-fueled expansion. Tulip Telecom has also become unsustainable under the weight of debt to build Asia’s largest data center in Bengaluru.
# 5 MRPL
Mangalore Refinery & Petrochemicals (MRPL) was established as a joint venture (JV) between the AV Birla group and Hindustan Petroleum Corporation (HPCL).
It operates a refinery in Mangalore with a nominal capacity of 15 m metric tons per year (MMTPA).
In March 2021, MRPL’s total debt stood at ??238,333m while his net worth stood at ??42,481 m.
Thus, MRPL has a debt ratio of 5.6.
MRPL has incurred huge losses in the past due to high debt service commitments.
Its subsidiary ONGC Mangalore Petrochemicals (OMPL) is highly indebted (approximately ??75,500 m in December 2020). MRPL is set to merge with OMPL, which is expected to be completed by fiscal 2022.
The rating agency ICRA believes that although MRPL has suffered significant cash losses and has significant repayment obligations in the future, these should be met partly from accrued liabilities and partly refinanced. .
# 6 TVS Motor Company
TVS Motor Company has a debt-to-equity ratio of 3.1 with total debt of ??119,307m and a net worth of ??38,266 m.
The company gave 16.1% return on equity to shareholders in fiscal 2021. Although TVS Motors uses a high amount of debt to increase returns, its ROE is quite low even with the use of debt. ‘a significant debt.
TVS is committed ??10 billion to manufacture electric vehicles (EV) under a separate vertical. The company has set up a factory dedicated to manufacturing electric vehicles, which it says is scalable.
What other stocks have high leverage?
Since banks and financial institutions tend to have higher debt when borrowing capital to lend, they are excluded from the above list.
However, if we included them, the list would be full.
Take a look at the chart below which shows other stocks, including banks and finance companies, with high leverage.
Why You Should Look For Debt Free Companies
Debt plays an important role in the financial performance of a business.
Companies with high debt ratios are riskier. This is because interest payments on the debt must be made at regular intervals.
If the business is unable to generate enough cash to service its debt, it risks bankruptcy.
This is why investors often look to companies with no debt and no moat.
Businesses without debt don’t have to worry much about a slowing economy or rising interest rates.
However, a high debt ratio can also be good sometimes as it shows that a company can service its debt and uses leverage to increase stock returns.
On the other hand, if the debt ratio becomes too high, the cost of borrowing will zoom.
Investors need financial analysis to support the risks they take in the stock market. Ratios like the debt ratio give a picture of the capital structure of the company.
This article is syndicated from Equitymaster.com
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