Sagging economic growth and consequently slowing demand is the single largest source of stress for Indian firms, says a recent study by Crisil Ltd. But liquidity pressures are not far behind.
As the chart shows, 72% of the companies surveyed fall in the medium and high vulnerability bracket when it comes to liquidity pressures. That is more than the 69% of the firms that face medium and high stress from a fall in demand.
A slowing economy has meant a pile-up of inventories and stretched working capital cycles for many companies. At the same time, interest rates—which had shown signs of easing—have been rising owing to the central bank’s defence of the rupee. Not only does a longer cash conversion cycle indicate greater vulnerability to liquidity pressures, in the current scenario, companies will also find it difficult to raise funds both through debt and equity.
Larger firms—those with operating income over Rs.1,000 crore—are more susceptible to liquidity pressures because of higher levels of indebtedness and the increasing stress on financing cost, says Crisil. Leaving out the least vulnerable companies, three-quarters of big-sized firms are impacted by liquidity pressures.
Crisil’s analysis also ties in with another rating agency Moody’s Investors Service’s findings: higher funding costs for rated Indian companies will put pressure on margins, particularly for firms already challenged by slower growth. While the latter suggests that the larger companies will manage to tide over this period, their credit metrics such as interest coverage and debt service coverage will deteriorate, as interest costs rise, which will reduce headroom under financial covenants. At the very least, margins are likely to be eroded because of higher financing costs.