High debt companies, which witnessed a massive fall in their cash flows due to the coronavirus (Covid-19) pandemic, heaved a sigh of relief as the Kamath panel identified several crucial sectors for immediate relief. However, the report is seen as 'too rigid’ by CEOs due to various strict parameters prescribed by the committee to become eligible for relief.
“Some of the parameters for borrowers need to be relaxed,” said the CEO of a large NBFC.
The India Inc leaders are also keenly watching the developments in the ongoing case in the Supreme Court, which is hearing the 'interest on interest’ during moratorium, and is expected to give its order soon.
The report has identified power, construction, steel, retail and real estate sectors among 26 sectors that need relief. “It’s good news for retail companies like Future Retail which saw its cash flows dry up due to the coronavirus pandemic and defaulted on loans --- ultimately leading to its sale to RIL. With this, it can go ahead with debt restructuring,” said an analyst with a brokerage.
The entire transport and hospitality sector including auto, aviation and hotels and airlines sectors will also get relief, according to the report.
The relief is important for India Inc as in Q1FY21, the aggregate net sales of the top 1,670 companies fell sharply by negative 25.3% while the net profits declined by almost 60% (yoy). Of this, nearly 35% of the companies reported de-growth in net sales of more than 50 per cent. Barring a few sectors such as telecom and pharma, the drop in net profits has been significantly lower at negative 29.4% in the June quarter. Despite the partial opening up, Indian companies are not expected to perform very well in the September quarter, say analysts.
In order to identify weak companies, the Kamath Committee has uniformly proposed thresholds for current ratio, DSCR (Debt Service Coverage Ratio) and ADSCR (Average Debt Service Coverage Ratio) in most of the sectors. The borrowers eligible under the current framework are standard accounts and as such, they may require some time to restore their position to pre-Covid-19 levels.
Real estate analysts said the relief will come at the project level and not at the company level. Several high debt companies such as Lodha Developers will be beneficiaries of the scheme.
In the roads sector, the panel said the financing is cash flow based and at SPV (special purpose vehicle) levels where the level of debt is decided at the time of initial project appraisal. It may also be noted that the working capital cycle in this sector is negative. Accordingly, ratios like debt/EBITDA and current ratio may not be relevant at the time of restructuring in this sector. Since cash flows of several projects are by way of annuity payments, the threshold ADSCR has been kept at 1.10, the report said. On trading, the report said the DSCR and average DSCR is not ascertainable for trading business as most of the companies do not use long term debt for funding their operations and are unlisted.
For the airline sector, the targeted current ratio has been kept low as the airlines operate on a cash and carry model for revenue purpose, thereby creating almost nil debtors and higher current liabilities in form of advance received from customers. These advances are approximately 2 months of yearly sales of the airline industries. The report said the airline enjoys credit of typically 6-9 months from vendors (including fuel payment) and DSCR is not ascertainable for airline industry since most of the airline companies work on refinancing of debt as a financing strategy. As a consequence, average DSCR is not ascertainable for airline industry. “’We have to study in detail how it will help us. The fact is that several airlines will fold up if relief does not come fast,” said the CEO of a leading airline.