Despite the temporary breather that Indian companies are likely to get by not being asked to disclose the losses they have made on foreign currency transactions, there are growing signs that corporate financials are deteriorating.
For example, drug firm Wockhardt said on Tuesday that it would be referred to the corporate debt restructuring, or CDR, cell of ICICI Bank. The company was weighed down by net debt of Rs3,400 crore at the end of December. That’s more than four times Wockhardt’s current stock market value. An estimated Rs765 crore of the firm’s debt will have to be paid back in the coming months, which promises to be an uphill task, given the firm’s current cash flows.
Illustration: Jayachandran / Mint
Wockhardt’s decision to use the CDR mechanism to try and revamp its debt is not unique. A growing number of firms are using this route. The Business Standard reported on Wednesday that the number of CDR cases has risen from 10 in 2007-08 to 30 in the fiscal year that ended on Tuesday.
Meanwhile, credit rating agencies have been on a downgrade spree in recent months. This newspaper reported on Thursday that there were 11 downgrades for each upgrade in 2008-09, a sure sign of growing balance sheet stresses. The so-called modified credit ratio, or MCR, which is the ratio of downgrades to upgrades, is usually a useful lead indicator of corporate performance in the future. The 229 downgrades in the last fiscal year are not good news at all.
Moves seeking a debt recast and a surge in downgrades are quite common in a downturn, when the inevitable excesses of the previous boom have to be purged from the system. Strong economic growth and easy availability of finance were good reasons for Indian companies to take on new risks and expand both domestically as well as abroad. But this often came at the cost of financial strain and a heavy debt burden. Too many Indian companies—from leading real estate firms to domestic airlines to large global acquirers such as Tata Motors and Hindalco—are now feeling the pressure.
The question now is: What next?
There are several possible responses—from discussions with lenders to recast debt, asset sales to generate cash to seeking new sources of funds. There is no magic pill here. Each company will have to do what works best for it. But we hope that the next government does not come in the way of this process by announcing bailouts for politically powerful business groups and industries.
How can Indian corporations manage their worsening financial situation? Tell us at email@example.com