Q1 results: 40% of corporate loans may require restructuring by banks

Firms that either reported operating losses or poor interest coverage ratio account for Rs 10.7 trn of debt

The quarterly results of listed companies suggest that banks may have to restructure a significant portion of their loan books under the new Reserve Bank of India provisions.

The early bird results for the April-June quarter show that companies which either reported operating losses or a poor interest coverage ratio (ICR) accounted for nearly 40 per cent of corporate borrowing.

Together, these companies had debts of Rs 10.7 trillion at the end of March this year. Besides nearly Rs 6 trillion worth of corporate borrowing is accounted for by firms that can slip into the stressed category if demand recovery is sub-par during the second half of FY21.

In all, 612 companies (excluding banks and insurance companies) have declared their first-quarter results, nearly a fifth of all listed companies. Of these, 93 reported operating losses during the quarter while another 54 showed an ICR of 1.5x or less.  Another 26 companies with borrowing of Rs 6.33 trillion reported an ICR of between 1.5x and 2x.

In comparison, all 612 companies in the Business Standard sample had a combined borrowing of Rs 25.8 trillion at the end of March this year. A ratio of operating profits or EBITDA (earnings before interest, tax, depreciation, and amortisation) to interest payment, the ICR measures a company’s ability to service its debt.  According to rating agencies, an ICR of less than 1.5x puts a company in a financially troubled zone while a ratio of less than one indicates default. 

An ICR of two or more is believed to be financially sustainable.

Analysts expect the amount to increase once the interest moratorium ends at the end of September. 

“The June-quarter results do not give a true picture of companies’ debt servicing capability because many firms that availed of the moratorium didn’t show interest cost in their profit and loss accounts,” said Madan Sabnavis, chief economist, CARE Ratings. The numbers could also change as more firms declare their Q1 results in the weeks ahead.

At macro level there has been a sharp deterioration in the earnings profile of India Inc in the last two quarters due to a dip in economic activities due to lockdown.  This is most visible in capital-intensive and debt-driven sectors such as infrastructure, automobile, capital goods, hospitality, aviation, and the non-banking financial space. Experts say many companies in these sectors may find it difficult to service their borrowing.

The combined operating profits of 612 companies in our sample are down 21 per cent in the quarter. Also their ICR declined to 2.9x from 3.8x a year ago. The ratio was a healthy 4.4x in the June 2018 quarter. (See the adjoining chart.)

Analysts expect the ICR to remain under pressure even in the second half of FY21.  “Many companies reported higher than expected operating profits in Q1FY21 due to a sharp cut in discretionary spending and exceptional gains from treasury income. Similarly, in many cases net profit got a boost from a tax write-back. These one-off gains may not be available in the second half of FY21 and will weigh on corporate profitability,” said G Chokkalingam , founder and managing director, Equinomics Research & Advisory Services.