Stressed assets & reputations PDF Print E-mail
Thursday, 23 February 2017 12:56
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Blurb: If stressed loans continue to haunt India Inc, issues of governance have hit sterling reputations at the Tatas & Infosys
With 41% of corporate debt in the hands of chronically stressed firms at the end of December 2016—that is, firms with an interest cover of less than 1—the overarching constraint to both investment and profitability continues to be high debt levels. And while profit margins worsened in FY16 despite the sharp contraction in raw material costs, even more alarming issues came to the fore this year.

The return of Ratan Tata and the fight to oust then Tata Sons chairman Cyrus Mistry occupied much of the headlines towards the end of last year—though N Chandrasekaran is the new Tata boss, the last is yet to be heard with the case continuing at the company courts. If this wasn’t enough, another bastion of corporate governance, Infosys, also saw such charges being leveled—if, in the Tata case, it was beleaguered chairman Mistry making the allegations, in the Infy case, it was the former promoters making the allegations in respect of severance payments made, while an anonymous whistleblower alleged irregularities in an acquisition by the firm. With all of this happening despite the undoubtedly superior performance under a Cyrus Mistry and a Vishal Sikka, India Inc is seeing a new kind of activism of owners/shareholders—whether that is good or bad is yet to be seen. 

Dodgy debt, the overarching theme of the last few years, has only got worse, so much so that it occupied a full chapter in the pre-budget Economic Survey, with the Chief Economic Advisor arguing this was the main constraint to investment—with two-thirds of dodgy bank debt held by those 24 firms who contributed the most to the investment boom of the late-2000s, he argued, India Inc is too cash-strapped to invest. A theme echoed in our lead story which points to the irony in India’s Mumbai airport being ranked as the best in the world while the company that built it —GVK Power and Infrastructure—has reported losses in four successive years. While GVK has just won the bid for the Navi Mumbai airport, it is not clear how the debt-strapped group can possibly raise the necessary funds. Over `26,000 crore of debt meant servicing of this ate up more than half the company’s revenues for the year— in Q2FY17, Credit Suisse data showed that while aggregate Ebitda rose 9% on a y-o-y basis, it contracted 24% for firms with an interest cover of less than one.

The year continued to see increased asset sales, thanks to consistent prodding by banks. And with the new bankruptcy law coming into existence, ICICI Bank filed a corporate insolvency application against Innoventive Industries Ltd—a Pune-based steel products maker—in the National Company Law Tribunal.  How this pans out will determine the pace of loan recovery. Meanwhile, with mounting stress in the telecom sector worsened by RJio’s free offerings – the company has already acquired more than 100 million subscribers—Vodafone and Idea are negotiating a potential merger. If things are grim in the telecom sector, matters are going from bad to worse in the power sector with plant load factors continuing to remain low and state electricity boards too cash-strapped to buy more power—whether this is the darkest hour before dawn is not clear, not just for the electricity sector (UDAY, the turnaround plan for the electricity sector, means dawn) but for all of corporate India.

Postscript: Though the top-500 companies comprise the bulk of India Inc’s revenues— the topline of the next-500 were less than a tenth of the top-500—we’ve expanded our coverage to 1,000 companies since KP Yoosef who has painstakingly done the data crunching all these years points out, growth is faster in the next-500 firms. While net revenues of the top- 500 contracted 1.7% in FY16, they rose 4% for the next-500; net profits for top-500 fell 9.3% while those for the next-500 rose 49.7%. Happy investing!!!



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