Zero-Debt Listed Companies

Zero-Debt Listed companies are those listed companies which has no debt in their
balance sheet. Zero-Debt firms swelled by 20% over the last financial year. At a time when the
corporate sector is facing severe liquidity problem, those with zero debt on their books are at an
advantage as they are largely insulated from the spike in interest rates.

Mint analysis (a Wall street journal) of the top 500 publicly traded companies on the
Bombay Stock Exchange (BSE) indicates that one out of six firms have zero debt. The analysis
is only based on data available from 130 firms of the 500 listed entities. Even from this group,
commercial banks and finance firms have been excluded as debt to equity ratio doesn’t mean
much for them since they are in the business of taking and lending money. Information
technology (IT) firms, too, were not considered for this analysis as they are traditionally
underleveraged. An Economic Times study of all listed companies showed that there were 66
Zero debt firms during Financial Year 2008 out of which one third were Indian companies of
listed multinational companies. The study focused on listed companies having a minimum of Rs.
100 crore of annual sales to focus on firms with a reasonable size. As against 66 such companies
during Financial Year 2008, there were 55 zero-debt firms in financial year 2007. The list of
zero-debt companies last financial year is dominated by MNCs who often choose to use funds
out of internal accruals for expansion in India. Further, Indian arms of multinational companies
restrict their business to India and hence do not require large amount of cash for overseas
acquisition, which has become one of the key capital expansion areas for many Indian firms.

Companies with zero debt often enjoy premium valuations. For example, the average
price-earnings (PE) ratio of zero-debt companies listed on the Bombay Stock Exchange is 42.1,
against an average of 15.4 for high-debt companies (with a debt-equity ratio of 3 or more). When
the need for funds arises, a zero-debt company will find it relatively easy to access funds, as
creditors usually avoid lending to highly leveraged companies, because of assets of company is
mortgaged to debt, and when firm becomes bankrupt the debtors given first preference.

Some of the MNCs who figure in the list of zero-debt companies include
GlaxoSmithKline Consumer, Aventis Pharma, Monsanto, BASF, Goodyear India and Gillette
India. Incidentally, many of these firms were also part of the list of zero-debt firms at the end of
previous financial year. Those firms, which entered the list last year, include Praj Industries, TV
Today, Sulzer, Blue Dart Express, Prism Cement, Goodyear (India), Gateway Distriparks, Aztec
Software, Mahindra Lifespace and Ricoh India. In total, there were 24 new firms in the group of
zero debt firms. Around 30 companies cut their borrowings over the years and trying to attain
zero-debt list. IFB Industries, Eicher Motors, Tata Sponge Iron, Balmer Lawrie & Co, and Hind
Copper are among 30 companies that are leading Indian corporates in attaining the status of a
zero-debt company, which fetching higher valuations in stock markets.