The market gave better-than-average returns despite it being ‘an election year’. Investors looking for stability shifted their focus to strong fundamentals and a few promising sectors rather than betting on the overall market.
With the economy battling inflation and high interest rates, companies had to find a way to take advantage of the country’s economic growth.
Hence, they learned to manage inflation, and focussed on debt reduction during the year to improve their financial health.
While most companies adopted this approach, we have shortlisted the top five companies that managed to reduce their debt by over 50%.
This coupled with improved financial performance, and significant growth in share price portrays strong resilience and strategic success.
Here’s the list…
#1 Indian Hotels Company
Part of the Tata Group, it is one of the leading hospitality companies in India and South Asia.
In the last year, the company reduced its debt from ₹8.1 billion (bn) to ₹2.6 billion due to strong cash flows.
In the last five years, the company focussed on asset light model, primarily through management contracts. This helped the company rapidly expand its hotels portfolio without much capex.
As a result, the company was left with sufficient cash to repay its debt.
A strong portfolio, support from parent company (Tata Sons) and a growing demand for travel, has helped the company grow its revenue by a compound annual growth rate (CAGR) of 8.7% in the last five years.
The gross and net profit of the company also grew by a CAGR of 16.4% and 27.9%, indicating its operational efficiency.
Its debt-to-equity ratio also reduced, and the interest coverage ratio improved consistently on account of strong growth in the company’s cashflows.
A strong financial performance also led to a positive performance on the bourses. In the last year, the company’s shares soared over 50%.
To take advantage of the growing demand for travel, the company is investing to expand its hotels portfolio. At present, it has 91 hotels in the under-construction stage, which will take the total portfolio from 220 to 311.
With the company generating more than sufficient cash through its current business, it plans to fund the capex through internal accruals and continue with its debt repayment strategy.
Going forward, with a growing share of management contracts in the portfolio, the revenue, net profit, and margins are also expected to go up in the medium term.
#2 Balaji Amines
The company is a premier manufacturer of a wide range of amines and their derivatives.
In the last one year, the company managed to reduce its debt by 65% from ₹575.7 million (m) to ₹196.9 m.
This is primarily because the company’s investment in expanding its speciality chemicals capacity has helped revenue and profit growth, which, in turn, has translated into healthy cash flows.
In the last five years, its revenue grew by a CAGR of 11.9%, whereas the EBITDA and net profit grew by a CAGR of 12.8% and 19% respectively on due to growth in its speciality chemicals business.
The debt-to-equity ratio turned zero, and the interest coverage ratio also expanded seven times, indicating strong cashflows.
Balaji Amines continues to invest in capex and plans to invest ₹3.5 bn in FY25 for capacity addition and upgrading of plants.
Moreover, it plans to commission a greenfield solar power plant and rooftop solar power plant in the current financial year.
Apart from this, the company also plans to expand its product portfolio by adding new products.
All this will drive the company’s performance in the medium term.
However, in the last year, due to volatility in raw material prices, lower global demand for chemicals has affected the company’s performance on the bourses. In the last one year, the stock price increased marginally.
#3 Dr Lal Pathlabs
It is one of the largest diagnostic chains, having over 70 years of experience.
In the last year, the company has cleared over 60% of its debt and reduced it to ₹833 m from ₹2,366 m.
This is primarily because the company managed to grow its revenue, gross profit, and net profit by a CAGR of 10.8%, 12.1%, and 9.7%, respectively, on account of the growing scale of operations, especially in tier 3 and tier 4 cities.
Apart from this, the marginal price increases, growing share of high margin specialised tests, and higher volume also aided the revenue and profit growth.
All this led to strong generation of cashflows, which the company used to repay its debt. At the end of financial year 2024, the debt-to-equity ratio stood at zero and the interest coverage ratio stood at 18.2, indicating high liquidity.
A strong financial performance positively affected the company’s shares, which grew by 40% in the last one year.
Going forward, the company continues to expand its presence in tier 3 and tier 4 cities which are highly underpenetrated.
It’s also concentrating on improving its international business. All the capex that the company will incur will be funded through internal accruals.
The company is also expanding in the genetic testing space to expand its product portfolio. All this will drive the company’s growth in the medium term.
#4 Avantel
The company is engaged in the business of designing, developing and maintaining wireless and satellite communication products, defence electronics, radar systems.
It also develops network management software applications for its customers, mainly from the aerospace and defence sectors.
In the last one year, the company’s total debt reduced by 59%, from ₹279 m to ₹115 m.
This is primarily because the company’s revenue has increased by almost four times in the last five years and grew at a CAGR of 30.7% on account of the growing order book.
Being an established player in the electronics and telecom equipment business, the company has a unique offering of embedded systems and related software used in the defence and telecom segment.
This helped the company secure orders from all major defence and telecom players.
Moreover, its in-house production of proprietary products has helped the company maintain a healthy profitability.
In the last five years, the gross and net profit grew by a CAGR of 39.7% and 37.3% respectively.
This helped the company improve its cash flows from operations, aiding in debt repayment.
Strong financial performance, new orders from existing and new customers, and the company’s strategic tie-ups with several customers have also supported the company’s performance on the bourses.
In the last one year, the company’s share price zoomed over 450%.
During the year, the company also launched new products, which helped the company secure high orders.
Going forward, the company plans to continue to invest in research and development (R&D) to launch new products. It is also investing in expanding its manufacturing facilities through greenfield route.
This will drive the company’s revenue and profit growth in the medium term.
#5 Cyient DLM
The company is a leading electronics system design and manufacturing player. It specialises in providing system design integration, testing, and manufacturing of electronic components and subsystems for original equipment manufacturers (OEMs).
The company primarily caters to aerospace and defence sectors in India, North America, Europe, Japan, and China.
Cyient DLM has managed to reduce its debt from ₹3.1 bn to ₹1.3 bn, which is a 57% decrease in just one year.
The company develops low volume high mix products with emphasis on customisation. This helped the company grow its revenue and gross profit by a CAGR of 21.1% and 51% in the last five years.
It also managed to convert its net loss into profits in just five years, indicating the company’s efficiency in running its business.
The company’s debt-to-equity reduced from 2.5x to 0.1x and the interest coverage ratio grew to 3.4x during the same period indicating sufficient liquidity.
A strong financial performance and growing order book have supported the company’s performance on the bourses. Its shares zoomed by 54.1% in the last one year.
The company is looking to expand in the North American and Middle Eastern regions through acquisitions and explore opportunities in disruptive industries like electric vehicles (EV) and 5G.
Its current order book and its plans to expand its operations outside India will drive its growth in the medium term.
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Why debt reduction is important
Companies that have low debt or consistently reduce their debt are financially more stable, are less likely to default on their financial obligations, and have the ability to face economic downturns.
Their profitability is also higher than companies with debt, as there are low or no interest payments that eat into the profits.
Finally, the growth potential of these companies is higher as the profits can be reinvested to expand the business.
However, it is important to note that a little debt on the balance sheet is considered good as long as the company is able to manage its debt well.
Remember, a fundamentally strong company with low and manageable debt is far better than a company with weak financials and zero debt.
Happy Investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
