Listed firms managing liquidity challenges well, says India Ratings

The listed entities are managing its liquidity challenges well despite rising inflation, slowing export demand and tightening fund conditions in the system, according to the India Ratings and Research (Ind-Ra).

There are pockets of stress building-up in 11 entities wherein 50 per cent or more shares held by the promoter or promoter group entities were pledged as of Q1FY23 (June 2022) and liquidity is tagged as stretched/poor across rating agencies.

Ind-Ra said the five investment grade ratings wherein the liquidity is tagged as stretched are rated in the BBB category. Other six entities are rated below investment grade. It, however, did not name the entities with stretched liquidity conditions.

Referring to sectors with high share pledges, the agency said infrastructure, iron & steel and textiles are the sectors which lead the list of the sectors with maximum entities having 50 per cent or more of the promoter shares pledged. The number of infrastructure companies are higher as many of them are under the IBC resolution process.  

The steep rise in commodity prices, elongation of working capital cycles and higher operating cost can be few of the reasons for the companies representing iron & steel and textile sectors raising liquidity through share pledge.

However, similar to the infrastructure sector, there are entities in the iron & steel and textiles sectors which have undergone debt restructuring leading to 100 per cent equity shares being pledged as a prelude to the process.

There are 610 BSE listed corporates with a varying percentage of promoter and promoter group shares being pledged. The objective of the exercise was to understand the scale of promoter and promoter shareholding which is pledged by these entities and the potential vulnerabilities that could arise from them.

Given the tightening liquidity conditions and higher cost of borrowings, corporates with a weak credit profile are likely to tap a loan against shares facility to meet their funding requirements.

Additionally, the volatile condition of equity capital market, especially price correction, is likely to create higher pledges to meet the minimum threshold requirements.  

“Given the already high level of pledge in case of some entities/sectors, the vulnerability to liquidity mismatch is expected to aggravate”, said Sagar Desai, senior analyst at Ind-Ra.