Worst yet to come for Indian corporates, says Fitch report

Indian corporates are at their most vulnerable since 2008,says a Fitch report.Not only is their cash generation ability at weakest since 2008 but also their debt servicing ability.Both these indicators point out to the inherent weakness of Indian companies.

Analysing the balance sheets of BSE 500 companies,fitch says that 64% of the companies show deterioration in the fund flow operations.Further these companies are limited in their ability to raise further debt.Balance sheet debt has risen 193% since 2008 says the report.Worst still is that high interest rate has resulted in interest expense rising at a higher rate as compared to debt. Interest expense in FY13 was 226% of their level in 2008.

Slowdown has resulted in stretched balance sheet of companies which can be judged from the fact that working capital cycle has increased by 50% since 2009.From a level of 40 days, the cycle in FY13 is at 61 days. This has been the main reason for the rise in debt and higher interest rates.

The report has identified sectors which are over leveraged and would need further capital to prevent deterioration of their ratings. Construction, infrastructure, shipping, metals and mining are some of the sectors which are witnessing stretched cash flows. Downside risks in real estate, retail, textile and power sectors are expected to remain. The report goes on to say that there can be deterioration in credit matrix in auto-ancillaries, agri-commodites, chemicals, fertilisers and engineering.

The only comforting sector Fitch says are IT, pharmaceuticals, cement (large integrated players) and FMCG.Worst still, gloom is likely to continue and deteriorate going forward. The next 12-18 months may arguably be the most challenging business environment Indian corporates will experience since 2000, says the report.

Though rating agencies like Fitch, CRISIL and CARE analyse companies with debt as the key input, their ramification is more profound on the equity markets. Companies service debt before they service equity. In other words, only after interest is paid can a company pay tax and dividend. Thus the first tell-tale sign of the health of a company can be judged on how they stand with respect to their debt.

The report clearly says that servicing debt will not be easy going forward, at least for the next 12-18 months. Thus outlook for equity will only be worst.