Thursday, May 28, 2009

Time to Invest in Debt Free Companies : Safest Bet

While spiralling interest rates would make the going tough for debt-heavy companies, there are many corporates which are unruffled. These are the debt-free corporates. At a time when many firms would be hit by insufficient cash flow and interest outgo on account of capital-intensive projects, these firms would be relatively unscathed.

The market seems to have taken their zero or lowdebt status a bit positively. These stocks have outperformed the overall market in the past one month. Led by Infosys Technologies, the list includes many pharma and FMCG multinational companies (MNCs) like Aventis Pharma, Pfizer, Astrazeneca Pharma, FAG Bearings, Esab India, Merck and many others. These are mostly cash-rich companies which do not need to raise large funds from the market to run their operations, according to analysts. However, being a zero or low-debt company does not always mean that the company is good for investment as one has to also look at many other factors like demand-supply situation, growth visibility and earnings prospects, say analysts.

“Higher interest rates will affect companies which have lined up major expansion plans. Construction players with large BOT projects are expected to take hit as 70-80% of their fund requirements are met through debt,” said India Infoline vice-president (research) Amar Ambani.

There are many FMCG and pharma MNCs which fall into the category of debt-free companies. The list includes Aventis Pharma, Pfizer, Astrazeneca Pharma, FAG Bearings, Esab India, Merck, Vesuvius India and SKF India. A few others like Castrol, Nestle, Colgate Palmolive, GSK Pharma and Alfa Laval have low debt in their books. “Though these are debt-free companies, mostly fund managers would look at growth-oriented stories for investment purpose. The market has ignored them for the time being but one can see selective action on the back of buyback/open offer announcements,” said Prabhudas Lilladher, head of research Ranjit Kapadia. With rising inflation, topline growth of FMCG companies will be under pressure amid a slowdown in consumer demand, he says.

The list of zero or low-debt companies also included a few ones outside IT, pharma and FMCG sectors. They are Praj Industries, Crisil, ICI India, 3M India, Gujarat Gas and Blue Dart Express.

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