Eighty-five companies that have collectively borrowed Rs4 trillion will find it tough to repay their loans, despite debt restructuring tools such as the scheme for sustainable structuring of stressed assets (S4A), India Ratings and Research Pvt. Ltd (Ind-Ra) said.
The primary reason for the precarious situation is a build-up of non-productive assets on the books of these companies, the ratings company said on Tuesday.
In a report documenting asset funding trends in 500 most indebted firms, analysts at India Ratings said increasing financial assets and decreasing fixed assets on the books of these firms indicate a turnaround might be difficult.
India Ratings said these 85 companies, which it termed vulnerable, are primarily in aviation, infrastructure and construction, consumer durables, sugar, engineering and equipment, and trading.
The 85 vulnerable borrowers saw fixed assets fall to half their total investments in June 2016, compared with 72% as on March 2011, India Ratings noted. In the same period, their financial assets rose from 26% to 45%.
“Entities which have sold off assets two-to-three years ago, their positions have worsened after selling off. They have sold good assets and now are left with worse assets. Money coming from good assets was not good enough to improve overall balance sheet,” said Rakesh Valecha, senior director and head, credit market and research at India Ratings and Research.
The rating agency believes that in case of restructuring mechanisms such as S4A, dependence on financial assets might prove to be a problem. Bankers tend to take more comfort on fixed assets since they feel these assets indicate a company’s underlying ability to bounce back. However, financial assets might just be an ad hoc facility to park funds or do not have clear rationale.
According to the assessment by India Ratings, 26 other companies which are classified as non-vulnerable corporate borrowers because of strong support from their parent companies and low volatility in cash flows, may also find it difficult to service debt adding up to Rs3.4 trillion. However, the probability of these firms defaulting is relatively lower than that of vulnerable companies.
“Ind-Ra opines equity investment could be used for deleveraging and improving capital structures. Corporates in this category primarily operate in real estate and telecom,” it said in the report.
In the report, it has made another classification of the 500 firms, dividing them into safe, cautious and risky segments. According to the study, there were 283 safe firms, 106 cautious and 111 risky ones on the list. Over 50% of risky and cautious borrowers had fixed assets coverage ratio of less than one, meaning they are unable to service their debt, the report said.
According to Valecha, for recovery, either debt levels need to come down or earnings need to increase for weak firms. An improvement in investment cycle which is the most significant contributor to earnings, is at least two years away, Valecha said.
With the recent demonetization move, recovery might take longer, he said.