For a majority of the value destroyers, borrowings now exceed their market value, putting them in a debt trap

If retail investors are still shying away from equity markets, there is a solid reason. Nearly half of India’s top companies have destroyed shareholder value since the 2008 Lehman crisis. Their market capitalisation has failed to keep pace with expansion in their balance sheets. As many as 77 of the 155 BSE-200 companies (excluding banking and financial ones) have either reported a decline in their market value since March 2008 or the rise in market capitalisation has lagged the increase in capital employed in the business.

The proportion of value destroyers shoots up to 65 per cent if information technology (IT), FMCG and pharmaceutical companies are excluded from the list. For a majority of the value destroyers (40 out of 77), borrowings now exceed their market value, putting them in a debt trap.

In all, since 2007-08, the 155 BSE-200 companies in the sample have together destroyed over Rs 22 lakh crore of shareholder wealth, or nearly 46 per cent of their combined market value in January 2014. The figure would shoot up by half, to nearly Rs 35 lakh crore, if the figures for IT, pharma and FMCG companies were excluded. Companies in these three sectors have together created a little over Rs 12 lakh crore worth of shareholder value in the past five years and now account for 40 per cent of the market value of all companies in our sample (see chart).

“A company’s return on capital employed (RoCE) is the sum of return on equity and return on borrowed capital, minus interest cost. So when RoCE starts falling, managements try to juice it up by increasing borrowings. But, if an economic downturn gets prolonged, like it happened after the global financial crisis of 2008, many companies find themselves in a vicious cycle of falling returns and market value and rising indebtedness,” explains Nitin Jain, head, capital markets, Edelweiss Capital.

Topping the list of companies whose market value has lagged balance-sheet expansion since March 2008 is Reliance Industries (RIL), followed by government-owned power producer NTPC, Bharti Airtel, DLF and Reliance Communications.

For more visit: Business Standard

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