More than 60 mid-cap companies have reduced their debt in the last three financial years by over 40% and are available cheaper or at near their five-year average valuations.
These include Zydus Lifescience, Gujarat State Petronet, Arvind, Gujarat Gas, Godawari Power, Fortis Healthcare, Hindustan Copper, Zydus Wellness and Deepak Nitrite.
Most of them have used improved cash flows to cut debt for better ratings and equity valuations, despite disruptions to business due to the Covid-19 pandemic two years back.
“Improving top line with declining interest costs will push up the earnings of these companies which have consistently reduced debt,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. “About 55% of Nifty Midcap 150 stocks are available below their five-year average valuations, and in this category, companies that have reduced their debt levels during the last three years stand out.”
Zydus Lifescience has reduced its debt by 85% in three years, from ₹7,986 crore in FY20 to ₹1,195 in FY23. The stock is currently trading at a PE of 21.2, near its five-year average.
Arvind has reduced its debt by 42% since FY20 to focus on the asset-light strategy of investing in the high asset turnover business by exiting non-core businesses. Gujarat Gas has cut its debt from ₹2,055 crore to ₹152 crore. For Godawari Power, the debt has come down from ₹1,697 crore to ₹317 crore.The debt-equity ratio of most of these companies is now below 0.5. Companies with a debt-equity ratio of under 0.5 have significantly outperformed those with a reading above 1 during a 3-5-year time frame, show past data.
“Many companies engaged in commodities have over the last three years reduced their long-term debt substantially using the free cash flows despite expanding to grow the business,” said S Ranganathan, head of research at LKP Securities.