14% rise in corporate debt under stress

Disruption caused by demonetisation and the economic slowdown seems to have complicated banks’ efforts to recover their dues from financially stressed companies. There was a further rise in the amount of bank debt tied up with stressed firms in 2016-17, reversing the improvements visible in 2015-16, when there was a year-on-year (YoY) decline in corporate debt under stress.

Corporate debt under financial stress was up 14 per cent, year on year, to Rs 5.07 lakh crore in 2016-17, against Rs 4.44 lakh crore a year ago. In contrast, corporate debt under stress had declined by 13.6 per cent, YoY, in 2015-16.

In all, 80 non-financial firms from the common sample of BSE 500, MidCap and SmallCap indices were unable to service interest on their debt in 2016-17 due to inadequate operating profit. In comparison, there were 83 firms in 2015-16 whose operating profits were lower than their interest payments.

Analysts attribute this to the continued slowdown in the industrial and construction sectors. “We cannot pin all the blame on disruption caused by demonetisation that largely impacted consumer segments. Most of the financially stressed firms are in sectors such as construction, infrastructure, textile, real estate, telecom, and power, which have not been directly impacted by the note ban. Companies in these sectors are suffering due to poor industrial growth and a near freeze in corporate investments. This will take time to recover,” says G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

He says that if there is a recovery in economic growth, many of these firms only have a limited chance to participate due to their poor financial condition. “Most of these firms do not have working capital to service new orders, making recovery much more difficult for them,” he adds.

The combined net losses of these financially stressed companies were 23 per cent higher in 2016-17 at nearly Rs 57,000 crore, against Rs 46,100 crore a year ago. Part of the rise in net losses is attributable to a rise in the companies’ interest burden. The combined interest obligation for these companies was up 28 per cent in 2016-17 to Rs 57,452 crore. In comparison, their operating profits were up 63 per cent to Rs 10,235 crore.

The numbers also suggest a further deterioration in the financial ratios of these financially stressed firms. For the first time in the last five years, these firms reported a decline in their net worth (or equity capital) even as their debt and total liabilities continued to rise. The combined net worth of these firms was down 41 per cent in 2016-17 to around Rs 91,000 crore, leading to a sharp rise in their leverage ratio. A typical stressed firm now has a debt to equity ratio of 5.6, the worst in the last five years and nearly double the ratio a year ago and four times that of 2013-14.

It is also showing in corporate India’s credit ratio, or the ratio of upgrades to downgrades of corporate debt paper. According to data from the Securities and Exchange Board of India, the credit ratio declined to a five-year low of 0.97 during the first half of the current financial year. In April-September 2017, rating agencies upgraded the debt issues of 189 companies and downgraded 195 others.

Public sector banks with exposure to these firms may have to settle for haircuts on their loans as not all of the debt is backed by underlying fixed assets. For example, loans exceeded the fixed assets for 43 of these 80 firms. Some of the prominent companies with inadequate assets are Jaiprakash Associates, Alok Industries, Punj Lloyd, Hindustan Construction, Tata Tele (Maharashtra) and IVRCL. At their current stock prices, most of these firms are also valued at a fraction of their loans outstanding, making recovery tough for banks.

At their current stock prices, these 80 firms have a combined market capitalisation of around ~2.5 lakh crore, valued at less than half their combined debt outstanding.

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