Degree of financial stress amongst India Inc is on a rise notes Credit Suisse in a report titled “house of debt”. According to the strategy note which analyses the indebtedness of several Indian corporate houses, despite attempts at de-leveraging, financial stress at these groups has intensified further.
The foreign brokerage house noted that the ten ‘House of Debt’ groups saw their respective debt levels increase by 5% in fiscal 2014-15 (FY15) and up 12% since the last edition of the report which was released in 2013.
“All the groups saw further rises in debt in FY15, which is now up 7x over past eight years to ~12% of system loans,” noted analysts Ashish Gupta, Kush Shah, and Prashant Kumar in the report dated October 21.
Credit Suisse further noted that while their loans are still “standard” at the banks, in past few weeks close to 35%to 65% of debt of four groups – Jaypee, Lanco, Essar, and GMR- has been downgraded to default by rating agencies.
The interest cover – a gauge of a company’s ability to pay interest on its outstanding debt – of these corporate houses dropped to 0.8 in fiscal 2014-15 compared to 0.9 in FY14. As per the report about 80% of the debt is with groups that had debt/EBITDA ratio greater than 6 in FY15 and nearly half with groups where interest cover remained below 1. The future also does not look promising given that while interest cover is less than 1, at 15% to -170%, a substantially larger part of P&L interest is still being capitalised.
Efforts of some corporate houses to cut back on capex and asset sales notwithstanding, the debt to EBITDA ratios of Jaypee and GMR groups have deteriorated further as they had to let go of relatively better assets as a part of their de-leveraging drive. As per the brokerage house some of the sold assets contributed as much as 70% of EBITDA.
As per Credit Suisse, given the high commodity and forex exposure, the financial stress for most of the groups is set to intensified. “ Most of the groups have high exposure to commodities and downswing here adds to their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international coal mine acquisitions. In addition, with 15-60% of their debt being in foreign currency, their debt servicing outlook continues to be of concern ” added the global investment bank.
It estimates that upto 20% to 90% of of debt for some of these groups – aggregating to $48 billion and equaling almost all of gross non-performing assets in the banking system – is now facing severe stress. Including this, total stressed loans of Indian banks would be at ~17%.