Debt cutters: 5 stocks with good upside potential | Economic Times

After getting burnt during the previous economic crisis, most companies went on a debt reduction spree in 2019-20 and the trend continued in pandemic affected 2020-21. Is this trend here to stay? Yes, experts say. “Massive balance sheet repairs are happening and this process will continue in 2021-22 and probably in 2022-23 as well,” says Satish Ramanathan, MD& CIO – Equity, JM Financial MF.How are companies reducing debt during a crisis? The massive liquidity tap, opened by global central bankers to fight pandemic-induced slowdown, is helping. In the first phase, this liquidity flowed into financial assets and created asset price inflation. The second phase has started now. “After lifting financial assets, liquidity is shifting to the real economy now,” says Kenneth Andrade, Founder and CIO, Oldbridge Capital Management.Most companies that reduced debt are from the infrastructure or commodity space. Infrastructure and real estate players are using instruments like Invits and Reits to monetise assets. While only Rs 2.1 lakh crore worth of assets have been floated through these instruments till now, over Rs 3.51 lakh crore of assets are set to be monetised through InvITs and REITs in the next one year. “By raising equity and reducing debt, many companies have become healthier and are preparing for the next capex cycle,” says Ashutosh Bishnoi, MD & CEO, Mahindra Manulife MF.The top 10 debt cutters of 2020-21 83661151The uptick in commodity cycle is helping players like Tata Steel, Steel Authority, Vedanta, etc to reduce debt massively. The future here looks bright because commodity prices are expected to remain firm in the coming year. “Commodity prices are expected to remain high because the US economy is looking up. China is also not slowing down commodity purchase,” says Bishnoi. Since these companies are not setting up large new capacities, their capex cost is also low helping them to report large free cash flow (FCF) during 2020-21.The promising namesThough many companies have reduced debt, not all are investment worthy. Some are working at full capacity and will be forced to increase capacity and debt later. “We like companies that have reduced debt and also have surplus capacity. Companies manufacturing global commodities or earning dollar income are good bets,” says Andrade. Share prices of many companies have jumped, leaving little room for further upside. Below are companies with decent upside potential from current levels.Some names boast decent upside potential83661177Tata SteelImprovement in steel prices helped Tata Steel generate a consolidated free cash flow (FCF) and bring down its debt-equity ratio to below 1. International steel prices are expected to remain firm in coming years. “Domestic steel prices are at a discount to import parity prices allowing companies to push through price hikes. European operations are also expected to remain profitable. We maintain our buy rating on Tata Steel,” says a recent Anand Rathi report.Jindal Steel & PowerJSPL is another steel company that has brought the debt-equity ratio to below 1. Its debt reduction efforts continue and JSPL has made a prepayment of Rs 2,460 crore in May 2021. Divestment of Jindal Power will bring entire focus to primary steel business. “The Jindal Power divestment deal should aid better value discovery for the steel business. Enterprise value of business is only 4.5 times its expected Ebitda in 2021-22 and is trading at a discount to peers,” says a Motilal Oswal report. Chambal Fertilisers & ChemsThe government’s recent subsidy largesse has helped Chambal Fertilisers to substantially deleverage its balance sheet in 2020-21. Subsidy outstanding from government as on March 2021 stands at Rs 1,100 crore, compared to Rs 5,350 crore a year back. Debt reduction is just one of the reasons for its potential rerating. “We see potential for a re-rating and its possible triggers are sustained delivery of robust earnings and cash flows, announcement of growth projects and an increase in dividend payout, ” says a recent IIFL Securities report.Prestige Estates ProjectsPrestige Estates Projects has used the proceeds of Rs 7,467 crore from its Phase 1 deal with Blackstone to bring down debt. Phase 2 of this transaction is expected to be completed by the first half of 2021-22. Part of these proceeds will be used for growth. Prestige plans to start a new construction cycle and ramp its asset portfolio again. Though this will push its debt again in coming years, it is expected to retain the debt-equity ratio below 0.5 times.Jubilant PharmovaThis is renamed Jubilant Life Sciences after demerging of its life science ingredients business into Jubilant Ingrevia. A part of the debt reduction can be attributed to the Rs 600 crore transfer of debt to Jubilant Ingrevia. Analysts are bullish on the counter due to its improving outlook. “We expect the company to post better margin performance and back on the growth track thanks to cost rationalisation and strong order book visibility in the CDMO segment along with partnerships for generic products,” says a recent ICICI Direct report.