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Vodafone Idea, Tata Motors and Adani Power top the list of chronically-stressed entities even as the corporate stressed debt across sectors dropped 37 per cent in the September quarter to ₹15-lakh crore against ₹24-lakh crore in the June quarter.
Corporate debt position has improved on the back of the gradual reopening of the economy after the lockdown and the economic stimulus announced by the government.
According to a Credit Suisse report ‘India Corporate Health Tracker’, the second quarter also saw the share of debt with companies having interest coverage ratio of less than one reduce sharply to 35 per cent from 45 per cent prior to Covid; this has been the best in the past five years.
Interest coverage ratio
The interest coverage ratio indicates the ability of a company to meet the interest expenses on outstanding debt. A ratio of less than one indicates the company is not generating enough profit to meet its interest obligation. In such a case, it is likely to use some of its cash reserves to meet the shortfall or borrow more to service the debt.
Led by metals (Tata Steel, JSW Steel, Hindalco and SAIL) and telecom (Bharti Airtel) sectors, the share of debt with loss-making companies was also down to 23 per cent from 28-30 per cent prior to Covid.
Steel prices are up 30 per cent year-on-year as well as over the past quarter, aiding strong improvement in profitability with EBITA(earnings before interest, taxes, depreciation and amortisation) rising 65 per cent YoY and four times quarter-on-quarter.
After the lockdown was imposed, the interest coverage spiked to 56 per cent in the June quarter. However, the exit of auto companies (Mahindra & Mahindra, Motherson Sumi and TVS Motor) from the list, besides Larsen & Toubro, provided relief, said the report.
Similarly, the share of corporate debt with interest coverage of less than one in the telecom sector dropped to 15 per cent, with Bharti Airtel exiting the list, after several quarters of steady improvement.
Post-Covid, the incremental stress on Corporate India appears limited, reflected in the statements of bank managements and rating agencies highlighting the fall in demand for restructuring in the corporate segments, the report added.
“The power sector saw some improvement; however, the plant load factor (PLFs) remained low at 52 per cent and, adjusting for one-offs, Adani Power and Reliance Power continue to have interest coverage of less than one,” said the Credit Suisse report.
Banks, the main beneficiary
Credit Suisse expects banks to be the major beneficiary of the trend in improved corporate health. The return on equity in Axis Bank, ICICI Bank, HDFC Bank and State Bank of India is expected to improve from the second half of the year. However, the chronically-stressed large corporates with interest coverage of less than one, based on their last fiscal borrowing, remains a concern for the banking sector.
The top 50 chronically-stressed corporates are led by Vodafone Idea, Tata Motors, Adani Power, GMR Infrastructure, NLC India, Reliance Power, MTNL, InterGlobe Aviation and Jaiprakash Associates.
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