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Riding on Leverage Stocks

Though leveraged, these stocks have the necessary interest repayment capacity to benefit from a full cycle

The general perception is to avoid investments in companies that are highly leveraged. It is true that such stocks suffer the most when the markets get choppy, they also tend to perform relatively better when the markets recover from such situations. The risks posed by such stocks include their sensitivity to the economic factors like interest rates changes, overseas borrowing rates and business cycle. The decision to invest in leveraged companies call for meticulous analysis, with their interest paying capacity and profitability in the long term being topmost criteria.

To arrive at leveraged companies, that still have it in them to make a case for investing, we analysed stocks that are highly leveraged, with debt to equity of more than 1, but have the margin of safety to service the debt. We then looked into their high return on capital employed (RoCE) and return on equity (RoE), safe interest coverage ratio, and cash generated from operating activities over the past 5 years. We figured that these 16 companies are financially healthy to repay the interest and principal. These are this, a safe bet not only for the expected bull run but also won't get into much trouble during bad times.

Company NameTotal Debt ₹cr)Debt to equityInterest (₹cr)Profit before tax (₹cr)Averag RoCE (%)
Aarti Industries8051.1311820619.71
Ahmednagar Forgings21342.3513325016.02
Balkrishna Industries21471.52770621.92
Coromandel International29461.3424053026.55
Glenmark Pharmaceuticals2765118991414.93
Greenply Industries6861.456015314.65
Jindal Steel & Power236491.161501251223.63
JK Lakshmi Cement13371.097713415.5
KRBL8361.057632115.45
Mahindra & Mahindra287111.452954550219
Motherson Sumi Systems41202.15294159620.73
Redington21501.3118749418.49
Relaxo Footwears2051.05239623.05
Tata Coffee9151.493723916.04
Tilaknagar Industries6311.45648519.18
Time Technoplast6561.019912817.27