India Inc has deleveraged, but trouble remains on balance sheets2 min read . Updated: 22 Nov 2020, 07:54 PM IST
For stressed debt levels to decline further, companies will need to see sustained revenue recovery that goes beyond the current festival boost. Financing conditions have considerably eased with liquidity in surplus and lending rates sharply down
Indian companies have been deleveraging for several years after shrinking profits made servicing debt challenging. This seems to have paid off as the pile of stressed debts has come down to a five-year low.
The total stressed debt pile of companies was ₹15 trillion as of the September quarter, 37% down from a year ago, according to a Credit Suisse Securities (India) Pvt. Ltd report. This is the debt load that companies were finding hard to service because of lower earnings.
What is heartening is that the drop comes despite a pandemic that has hurt revenues across sectors. Companies have been able to bounce back quickly in the ensuing three months from a fiscal first quarter loss because of a lockdown to contain the pandemic. “An improvement was anticipated from the first quarter spike on the back of lockdowns that had brought auto and industrial companies into the list. However, the drop was better than expected with aggregate Q2 Ebitda up 54% quarter-on-quarter and the share of debt with interest cover of below 1 dropping even below pre-Covid levels," the report said.
The improvement has brought cheer but pockets of pain still remain. Investors should worry that firms that were the most stressed have become worse. About 60% of the stressed debt is from companies that are chronically stressed and have reported interest cover of below one for at least three quarters. In many cases, even large companies have reported low interest cover ratio for one year. Not surprisingly, many of the companies with chronic stress belong to the infrastructure sector.
The drop in stressed debt comes predominantly from the exit of a handful of large companies in steel and telecom such as Bharti Airtel Ltd and Tata Steel Ltd. What this shows is that the reduction in stress has not been broad-based.
Nevertheless, the drop in stressed debt augurs well for Indian banks’ asset quality. As such, analysts are expecting banks to report better asset quality metrics than anticipated earlier. “We have now started to see commentary turning positive," wrote analysts at Kotak Institutional Equities in a note. “The large corporate book and even the retail book are witnessing negligible restructuring proposals currently," the note said.
Share prices of big banks have gained recently on the back of such expectations. The Nifty Bank index has risen 26% in the past three months, outperforming the broad market.
Companies will need to see sustained revenue recovery that goes beyond the current expected festival boost, for stressed debt levels to come down further. Financing conditions have considerably eased with liquidity in surfeit and lending rates sharply down. The jury is still out on sustained stressed debt reduction, but the odds of further improvement seem high now.