Risk comes in many shapes and forms

August 2013

While at Driehaus Capital Management we continue to look for growth opportunities, we also are on the lookout for areas to avoid. For example, the significant rise of debt in the Indian corporate sector is one source of concern for us. Net debt of the country’s top 750 companies (ex-banks) has grown five-fold during the past six years to about $250 billion. The average net debt-to-equity ratio of the leveraged companies has almost doubled to 1x, as shown in the chart below, while interest coverage of these highly leveraged companies has halved over the same period.

Net-debt-to-equity for leveraged companies is now at a multi-year high

The return on equity of these highly leveraged companies has dropped from 18.9% in fiscal year 2007 to 8.1% in 2013 despite an increase in leverage. This indicates stress in the operational business environment at a time when the local economy, due to various reasons, runs the risk of a further slowdown. Avoiding companies with these characteristics, such as select Indian industrial companies and banks with exposure to them, has benefited our emerging markets portfolios.