By: Tavaga Research
Debt-free companies meaning
Debt financing is the money a company borrows to run their operations, as opposed to equity financing where companies raise money from investors who are then entitled to share profits that the company earns. Think of this, as being divided into two broad categories depending on the type of loan a company is seeking, short-term, and long-term debt.
Debt financing is a time-bound activity where the borrower is obliged to repay the borrowed amount along with interest within the agreed period.
The cost of debt (interest) is fully tax-deductible as a business expense. However, debt brings in some rigidity in the balance sheet by introducing a fixed repayment schedule.
For instance, if a company with high debt on the books encounters some kind of a challenge in its business, then it could find itself struggling to remain profitable. Assuming that the company is able to cut back on other costs, it could still struggle with high fixed debt cost.
What is net debt?
Looking at the debt level, in the abstract, reveals very little information about the overall leverage situation. Therefore, it is always recommended to take a holistic view of a company’s debt. This is where net debt comes in.
Net debt measures a company’s ability to pay its debt if it falls due today.
Net debt is the debt that would remain after paying as much debt as possible with its liquid assets. In simple terms, it is the borrowings (both short-term and long-term) minus cash and cash equivalents. So, if a company has a debt of Rs 100 and cash of Rs 80, the net debt would be Rs 20 (100 minus 80).
The prefix “net” before “debt is crucial here. When a business says that it has become net debt-free, that does not imply that the company has repaid all of its borrowings. The debt very much exits on the books, until it is fully paid off. A company can be net-debt free without paying off debt.
Debt-Free Companies In India – Large-cap Stocks
1. ITC Limited – Is ITC a debt-free company?
ITC Limited is one of India’s foremost multinational conglomerates headquartered in Kolkata, West Bengal. It currently has a market capitalization of around Rs 2.5 lakh crore and gross sales of Rs 456 billion (as of 31 March 2020). ITC has a diverse presence in Cigarettes, FMCG, Agri-Business, Hotels, and Paper & Packaging.
ITC depends heavily on its Cigarette business but has been able to diversify in the last 10 years from the perspective of sales, with cigarettes now accounting for around 40 percent of sales.
However, the contribution of the cigarette business towards ITC’s profits remains the major factor driving the stock performance down (due to ESG considerations).
The share price of ITC has seen a sharp decrease after the third-quarter result in the last financial year. The company has been the biggest underperformer among large-cap consumer companies in the past six years.
10- Year Performance of ITC
The topline and earnings growth for the company has been tepid in the past five years. The return on capital employed (ROCE) and return on equity (ROE) have come down significantly over the past decade.
ITC is well-known for being in the category of ‘Debt-free companies that pay dividends’.
2. Hindustan Unilever Limited (HUL) – Is HUL a debt-free company?
HUL is one of the largest fast-moving consumer goods company in India with over 80 years of operating history. The company is so entrenched within the general Indian psyche that more than nine out of ten households in India use one or the other products offered by the company. This puts HUL in a unique position.
The brands’ portfolio of HUL includes household names such as Surf Excel, Lux, Lifebuoy, Dove, Fair & Lovely, Rin, Wheel, Vaseline, Sunsilk, Axe, Lakme, Pepsodent, Closeup, Brooke Bond, Kwality Wall’s, Knorr, Pond’s Clinic Plus, Lipton, Kissan, etc. Post its merger with GlaxoSmithKline Consumer Healthcare Limited; HUL has also acquired brands such as Boost, Horlicks, among others.
10-Year Performance of Hindustan Unilever
HUL operates in three broad segments including Home Care, Beauty & Personal Care, Foods & Refreshments, and others.
The segment wise revenue breakup for FY20 is displayed in the graph below.
3. Reliance Industries
Reliance Industries continues to be India’s largest company (M-cap wise). Its various competitors watch the financial result of the company very closely since small actions by the company have a large bearing on the entire industry that it operates in.
While petrochemicals and refining continue to dominate both the top and the bottom line, digital services are starting to contribute an increasing proportion to the bottom line, with the company betting heavily on Jio to lead India’s big digital leap.
Having become net debt-free, the company now has the wherewithal to further hurt its debt-heavy competitors, in the telecommunications space.
The company is poised to observe a drastic change in its revenue and profit mix over the next decade, given that the company is investing heavily in technology.
Financial services is now a separate operating segment for the company, highlighting Reliance’s plan to level its large user base and offer financial solutions and perhaps offer an unprecedented mix of financial and digital services.
The company has raised a series of investments from various investors, becoming net debt-free.
The net debt for the company at the end of March 2020 stood at Rs 1.61 lakh crores (outstanding debt of Rs 3.36 lakh crore minus cash and cash equivalents of Rs 1.75 lakh crores). The company has raised Rs 1.69 lakh crore (Rs 53,000 crore from the rights issue and Rs 1.16 lakh crore from Jio deals), making it net debt-free.
The market capitalization of Reliance currently stands at Rs 12.76 trillion.
10-Year Performance of Reliance Industries
Debt-Free Mid-Cap Companies In India 2020
4. Bata India
Established in 1931, Bata India Limited is the largest manufacturer and retailer of footwear in the country. They produce all kinds of footwear across four strategically located state of the art manufacturing facilities spread around the country.
The company has a strong pan-India retail presence with over a thousand stores spread across India, including their franchisee stores.
10-Year Performance of Bata India
The company has witnessed strong growth in revenue over the past couple of years. The market capitalization of the company currently stands at Rs 203.32 billion, with a debt-to-equity ratio of 0.
5. Whirlpool Of India Ltd
Whirlpool of India is a debt-free company with cash and cash equivalent of Rs 1948.53 crore at the end of 30th September 2020 up from Rs 1284 crore at the end of 31 March 2020.
It is one of the leading manufacturers and traders of electronic appliances such as washing machines and refrigerators. It also manufactures and trades microwave ovens, air conditioners, built-in and small appliances catering to both international and domestic markets.
10-Year Performance of Whirlpool
The company has been under pressure due to increasing competition in the refrigerator segment, which has been the driver of growth for the company.
Whirlpool has also seen relatively lower growth in the washing machine, room AC and service revenue.
Debt-Free Companies In Stock Market | Debt-free Small-Cap Company In India 2020
6. Persistent Systems
Persistent Systems is a global solutions company delivering enterprise modernization and digital business acceleration for companies across industries and geographies.
The company is focused on building a unique combination of powerful cloud-based applications, platforms, and tools for clients, working with several leading cloud companies as partners.
The company offers a complete product life cycle service. It has a global presence with specialization in software products, services, and technology innovation.
The market capitalization of the company currently stands at Rs 11,115 crores.
10-Year Performance of Persistent Systems
Debt-Free Companies Screener – Some more examples
|HCL Technologies Ltd|
|Tata Consumer Products Ltd|
High debt companies in India
|Power Grid Corporation|
|Steel Authority of India (SAIL)|
|Bharat Petroleum Corporation (BPCL)|
|Hindustan Petroleum Corporation (HPCL)|
The most attractive feature about debt financing is the lenders do not take an equity position in the company. The ownership pattern remains the same and the lender has no control over the operations of the business, although there are certain restrictions that are inbuilt in the loan documents, known as covenants.
While analyzing companies for investment purposes, it is essential to keep in mind that just because a company is debt-free doesn’t make it the obvious investment choice. Just a glance at the top debt-free companies, mentioned above, would reveal that not all of them are the most sought-after companies after all.
Debt is like an essential instrument in the process of achieving growth and making good of opportunities available out there. The key lies in looking for companies that maintain an optimal balance between growth and debt as opposed to looking for debt-free companies.
Disclaimer: The above analysis is not a recommendation and should be only used for informational and educational purposes.
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