Corporate loan stress increases in FY17

65 companies had less operating profit than interest payment during H1FY17, up from 59 during FY16

The share of corporate debt under stress rose during the first half of 2016-17, after improving in 2015-16.

Listed companies accounting for 18 per cent of all corporate debt were unable to service this in the first half, up from 14.6 per cent during FY16. The ratio had peaked at 19.3 in FY15. In all, 65 companies (excluding banks and financial entities) had less operating profit than the interest payment during the first half of FY17, up from 59 during FY16.

The analysis is based on a sample of 650 non-financial companies from the BSE 500, BSE mid-cap and BSE small-cap index.

Some of those whose interest expenses exceeded their operating profit during the first half were Alok Industries, JP Associates, Bhushan Steel, Amtek Auto, GMR Infra, Mahanagar Telephone Nigam, Steel Authority of India, Ballarpur Industries, Monnet Ispat, Jindal Steel, IVRCL, Videocon Industries and JP Power Ventures.

These 65 companies reported a combined operating profit of Rs 4,162 crore during the first half, against their combined interest obligation of Rs 21,403 crore. They were together sitting on gross debt worth around Rs 6 lakh crore at the end of FY16, up from Rs 5.72 lakh crore a year before. The consolidated balance sheet is not available for all companies for April-September 2016.

Experts attribute this to the global commodity cycle and restructuring of corporate debt. “In FY16, many financially stressed companies gained a reprieve from the corporate debt restructuring announced by banks for stressed accounts. The gains are now fizzling out. Besides, manufacturing companies gained from lower commodity prices in FY16; this is now ending, due to the sharp rise in commodity prices in the past year,” says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.

He expects more deterioration in the corporate credit profile during the second half of FY17, pointing to a decline in demand after demonetisation and emergence of financial stress in sectors such as telecom. Besides, rising commodity prices and the resulting rise in input cost, if not matched by incremental volume growth.

Rating agencies agree. CARE Ratings reported a further deterioration in the credit metrics of the companies in its scrutiny in FY17. The Modified Credit Ratio (MCR) for its rated entities in FY17 touched a three-year low of 1.04. According to the agency, the rating upgrades moderated and rating downgrades increased in 2016-17, reflecting the pressure on credit quality faced by certain segments. There were 770 upgrades in the CARE universe, down from 937 a year before. In the same period, rating downgrades increased to 576, from 454 a year before. Their rating universe has 5,487 entities, across sectors.

MCR and its movement reflects the change in credit quality in the system. It is defined as the ratio of upgrades and reaffirmations to downgrades and reaffirmations. An increase denotes an increase in upgrades vis-à-vis downgrades; a decrease in MCR shows the reverse.

On the brighter side, the number of rating reaffirmations (75 per cent of surveillance rating actions) saw an increase of 24 per cent from a year before. CARE says downgrades were recorded largely in automobiles, banks, construction, metals, power, apparel, pharmaceuticals and real estate. Triggered by factors such as delay in debt servicing, deterioration in profit margin, delay/cancellation of projects, stressed liquidity, dip in scale of operations, and losses or erosion in net worth.