Balance sheet woes
Sticky interest rates at high levels, limited access to liquidity and slow growth in consumption imply negligible cash generation abilities for companies
Balance sheet deterioration among companies has been a big concern through the recent economic downturn. At the macro-level, there are some green shoots of recovery visible.
However, sticky interest rates at high levels, limited access to liquidity and slow growth in consumption imply negligible cash generation abilities for companies. A note by India Ratings and Research Pvt. Ltd, which analysed the 500 largest corporates by debt, says the situation is only marginally better than that experienced in fiscal 2013, when 53% of the companies saw a deterioration in their net cash cycle.
Nearly five out of 12 sectors showed deterioration in operating performance. Sectors like retail, pharma, agri commodities, real estate, and infrastructure and construction had nearly 50% of the companies in the “slippages" and “sequential decline" category.
What’s of greater consequence is that 11 out of the 12 sectors have reduced ability to service interest obligations with funds from operations (see chart). However, the key positive now is that a gradual economic recovery will help companies sail through as revenue and profit from operations improve. The catch here is that there should be no external shocks. At this point, the macro-economic outlook, with falling inflation and likelihood of lower interest rates in the medium term, seems to favour companies. A vibrant equity market mood may also help companies raise funds through the equity route to address their debt concerns.
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