The report has identified power, construction, steel, retail and real estate sectors among 26 sectors that need relief. “It’s good news
for retail companies
like Future Retail
which saw its cash flows dry up due to the coronavirus
pandemic and defaulted on loans --- ultimately leading to its sale to RIL. With this, it can go ahead with debt restructuring,” said an analyst with a brokerage.
The entire transport and hospitality sector including auto, aviation and hotels and airlines sectors will also get relief, according to the report.
The relief is important for India Inc
as in Q1FY21, the aggregate net sales of the top 1,670 companies
fell sharply by negative 25.3% while the net profits declined by almost 60% (yoy). Of this, nearly 35% of the companies
reported de-growth in net sales of more than 50 per cent. Barring a few sectors such as telecom and pharma, the drop in net profits has been significantly lower at negative 29.4% in the June quarter. Despite the partial opening up, Indian companies are not expected to perform very well in the September quarter, say analysts.
In order to identify weak companies, the Kamath Committee has uniformly proposed thresholds for current ratio, DSCR (Debt Service Coverage Ratio) and ADSCR (Average Debt Service Coverage Ratio) in most of the sectors. The borrowers eligible under the current framework are standard accounts and as such, they may require some time to restore their position to pre-Covid-19 levels.
Real estate analysts said the relief will come at the project level and not at the company level. Several high debt companies such as Lodha Developers will be beneficiaries of the scheme.
In the roads sector, the panel said the financing is cash flow based and at SPV (special purpose vehicle) levels where the level of debt is decided at the time of initial project appraisal. It may also be noted that the working capital cycle in this sector is negative. Accordingly, ratios like debt/EBITDA and current ratio may not be relevant at the time of restructuring in this sector. Since cash flows of several projects are by way of annuity payments, the threshold ADSCR has been kept at 1.10, the report said. On trading, the report said the DSCR and average DSCR is not ascertainable for trading business as most of the companies do not use long term debt for funding their operations and are unlisted.
For the airline sector, the targeted current ratio has been kept low as the airlines operate on a cash and carry model for revenue purpose, thereby creating almost nil debtors and higher current liabilities in form of advance received from customers. These advances are approximately 2 months of yearly sales of the airline industries. The report said the airline enjoys credit of typically 6-9 months from vendors (including fuel payment) and DSCR is not ascertainable for airline industry since most of the airline companies work on refinancing of debt as a financing strategy. As a consequence, average DSCR is not ascertainable for airline industry. “’We have to study in detail how it will help us. The fact is that several airlines will fold up if relief does not come fast,” said the CEO of a leading airline.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.