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Business News/ Opinion / Online-views/  Companies | An upturn is uncertain
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Companies | An upturn is uncertain

India's corporate investment and growth had gone into a long and deep slumber. In 2016, we may see the first signs of awakening

The saving grace for Indian corporate entities could come from the expected bounce in certain beaten-down sectors, mainly due to plant closures, transfers to stronger hands and a general decline in supply. Photo: ReutersPremium
The saving grace for Indian corporate entities could come from the expected bounce in certain beaten-down sectors, mainly due to plant closures, transfers to stronger hands and a general decline in supply. Photo: Reuters

It doesn’t need crystal ball gazing to say 2016 will witness the capitulation of some very large corporate defaulters in India. The unravelling has already begun for many Indian companies fattened on the easy debt diet of the past 10 years. In the last month alone, the Jaypee group, which is carrying a total debt of nearly 64,000 crore, looked to sell off its Yamuna expressway project, which is just the kind of project that led to its financial troubles in the first place. Anil Ambani’s Reliance Group is also busy selling assets ranging from telecom towers to cement units at a pace faster than it created them.

The Reserve Bank of India’s (RBI’s) Financial Stability Report, out recently, pointed to the risk posed to the financial system by the weak balance sheets of large, debt-heavy firms with one-fifth of all listed firms carrying levels of debt in excess of what is considered prudent, all of it adding up to 5.65 trillion. The message from the central bank to lenders is unequivocally stern—clean up the balance sheets by 2017 to help revive credit growth. But the capitulation of these debtors is going to come with massive pain since the transfer of many of these large debt packets is likely to happen at slump sale valuations.

The process, though, has picked up momentum and is likely to have a positive fallout. A successful deleveraging will mean some uptick in private investment from the capital expenditure of these deleveraged firms. Reliance Group, for instance, is targeting the defence production sector after exiting many of its existing lemons.

The saving grace for the Indian corporate entities could come from the expected bounce in certain beaten-down sectors, mainly due to plant closures, transfers to stronger hands and a general decline in supply. Downstream petrochemicals, metal-works, chemicals and specialty chemicals, heavy chemicals, agri-inputs including pesticides and fertilizers are the kind of non-glamorous but steady sectors where corporate gains can be expected. Their impact on the overall economy will be less spectacular but more significant.

In the much-pursued sectors of the first decade of this century, much of the bad news may be behind us as government intervention lets sinners off the hook. Eventually, all telecom debt will be paid, and with UDAY (Ujwal Discom Assurance Yojana), the government’s recently announced bailout scheme for power distribution firms, the same can be assumed for the power sector as well. But the grief in steel and infrastructure will be slow to dispel. The problem will be new credit offtake in a deflationary economy. Not surprisingly, credit growth will lag growth in the nominal economy which is good for the economy as a whole, but bad for bank non-performing assets (NPAs). At current rates, it will take almost a decade for the banks to get fully cleaned up unless, of course, the government decides to recapitalize some of them, or come up with sectoral reforms like it has done for sugar, power and now steel.

The current scenario is looking like a mini-credit recession, which has been the basis of the ongoing slowdown. The silver lining is in small- and micro-caps, which are deleveraged and which is where growth will come from. In the case of this segment, it is just a leverage issue: they are the first to be denied credit when things go bad, and they also get lower repayment periods. So, they deleverage first and faster, and they are reinvesting profits before the capital expenditure cycle turns. According to rating company Crisil Ltd, there were 3.2 times more upgrades than downgrades among firms with a revenue between $20 million and $100 million in 2015, the best ratio in almost five years. Bloomberg data showed the median listed mid-cap company had debt equivalent to 79.8% of equity, better than the 87.6% for larger companies. Similarly, the median debt to assets ratio of listed smaller firms was 31.6% in their latest filings, lower than the 32.3% of larger companies.

But even here, revenue will not grow as rapidly. It is just that the profitability decline has bottomed out. While the markets might discount this early, the actual economy will take time to absorb and reflect this.

The next two Federal Open Market Committee (FOMC) meetings are on 27-28 January and 17-18 March. If there is another rate increase, it is likely to have some effect on the emerging markets as well as on currencies, besides triggering a correction in the US stock market. The surprising decline of the dollar will kick off some other spin-offs in India. Thus, information technology companies and the service economy will face deflation; and while all those companies with forex debt will save on interest cost, India’s export competitiveness will decline primarily because relatively loose monetary policy creates deflationary pressures in the long run. Flows will come in through the balance sheet and go out through the profit and loss accounts of companies.

What’s more?

Since the credit recession is a universal phenomenon, it will see only brownfield expansions mostly incorporating modernizing and balancing equipment and de-bottlenecking. The result will be steady capital expenditure, which may not even be reported as such, though capacity will start to go up incrementally. The ballast needed for true greenfield expansion is just not there at this point. Like Rip Van Winkle, India’s corporate investment and growth had gone into a long and deep slumber. In 2016, we may see the first signs of awakening. But all of it will depend on how deep is the Chinese growth slowdown. If, as some experts say, what we saw in China in 2015 was the tip of the iceberg, 2016 could see the country’s economy unravelling even more rapidly (debt is still running at twice the nominal gross domestic product), setting the stage for a global recession. All bets are then off.

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Published: 31 Dec 2015, 09:42 PM IST
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