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India Ratings and Research (Ind-Ra) says that 111 of the top 500 corporate borrowers, which held INR7.4trn of the overall debt of INR30.2trn at FYE16, are unlikely to generate higher return on capital employed (ROCE) than weighted average cost of capital (WACC), even in a high economic growth scenario. The agency attributed this to an incremental build-up of relatively high non-productive assets during FY11-FY16. Such corporates witnessed a decline in the proportion of their fixed assets to total assets to 52% in FY16 from 71% in FY11. As a result, the credit metrics of these corporates are likely to marginally improve in the near term.
85 Corporates with Relatively Weak Asset Quality Unlikely to Revive Ind-Ra analysed the balance sheets of borrowers for the period FY11-FY16. The agency observed that INR4trn of the INR12.4trn debt as at FYE16 of the 240 Vulnerable corporates was held by entities with a relatively high proportion of non-productive assets and weak cash flows. Debt servicing could remain a challenge for such corporates. Hence, these entities must engage in deep debt restructurings and reduce their debt significantly for long-term sustainability. Banks exposed to such entities may find it difficult to fit these corporates into the Scheme for Sustainable Structuring of Stressed Assets (S4A). Largely, corporates from infrastructure and construction, sugar, consumer durables, engineering and equipment, airlines and trading have a relatively high proportion of non-productive assets and a structural mismatch in cash flows.
155 Corporates with Relatively Better Asset Quality to Gain from Economic Recovery
Ind-Ra believes that corporates with a relatively high proportion of productive assets but with cash flow mismatches have a better chance of servicing their debts. Such corporates accounted for INR8.4trn debt of the overall Vulnerable debt. Ind-Ra believes such corporates could fall under the ambit of S4A scheme. Although haircuts may still be inevitable in many of them, quantum could be significantly lower. Such entities are likely to generate higher ROCE than WACC as the economy recovers. With an economic recovery, sectors such as oil and gas, metals and mining, power and textile are likely to rebound.
26 Corporates with Relatively Weak Asset Quality to Continue to Receive Lender Support
Ind-Ra expects lower shareholder returns to be generated by 26 Non-Vulnerable corporates with low volatility in cash flows but a relatively high proportion of non-productive assets. These entities accounted for INR3.4trn of the INR17.8trn debt held by Non-Vulnerable corporates. The debt servicing ability of these corporates would remain intact, as many of them benefit from strong parentage. Ind-Ra believes equity investment would be the most desirable option for these entities to deleverage and improve their capital structure. Sectors such as real estate and telecom have corporates with a relatively high proportion of non-productive assets and low, but, positive cash flow growth.
234 Corporates with Relatively Better Asset Quality to Drive Private Sector Capex
Corporates with strong profitability levels, healthy capital structures and a relatively higher productive asset base hold INR14.3trn debt of the overall Non-Vulnerable debt. These entities are likely to significantly benefit from an economic recovery. Ind-Ra believes these corporates would be the key driver of a revival in private sector investment. Corporates from sectors such as auto and automotive supplier, cement, chemical and pharmaceutical have low cash flow volatility and a high proportion of productive assets.
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