EXTREME STRESS
The only man who sticks closer to you in adversity than a friend is a creditor,” 62-year-old Harsh Goenka, Chairman of RPG Enterprises, quotes a famous line to describe the current predicament of corporate India whose debt in stressed sectors amounts to ₹37.72 lakh crore, nearly 38 per cent of all loans given by the banking sector.
The magnitude of stress is akin to Black Swan events such as the global financial crisis of 2008 or the Great Depression of 1929 when thousands of companies had to file for bankruptcy.
India Inc., already under pressure due to several quarters of falling GDP growth, and dealt a severe blow by recent lockdowns, is staring at massive ratings downgrade and loan defaults.
The reason: Its capacity to service debt is weakening due to low capacity utilisation and falling revenues and profits, triggering a flurry of actions ranging from sale of assets/stakes, shutting down of stressed businesses, frenetic fund-raising and sharp, almost brutal, reduction in costs. This will particularly hurt firms with high debt and low interest coverage ratio, or ICR, which measures how many times a company’s earnings can cover current interest payments.
Those with low ICR include giants such as Anil Agarwal’s Vedanta Ltd, Gautam Adani’s Adani Power and Sunil Mittal’s Bharti Airtel. Many of them can tide over the crisis with support from other group companies and assets (L&T, for example, plans to reduce its ₹1.24 lakh crore debt by ₹30,000 crore by March 2021 by selling L&T Infrastructure Development Projects and Nabha Power and transferring Hyderabad Metro stake to an investment trust). However, further worsening of the economic environment could spell trouble for the giants too. Vedanta did not repond to BT's queries while Bharti Airtel says lenders do not have issues with its debt and its ratings, in fact, were upgraded recently after a favourable ruling in the AGR case.
research shows ominous signs right from the September 2018 quarter when growth in gross sales
