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The balance sheet strength of corporates is key to survive the Covid-19 pandemic, according to State Bank of India’s economic research report ‘Ecowrap’.
As per the assessment of the bank’s economic research department, no sector is untouched by the impact of Covid-19 and subsequent lockdowns. The economic pain will prolong even after opening up.
Results in Q4 (January-March) FY20 (in listed space excluding Banking, Financial Services & Insurance (BFSI) and refineries) reveal a de-growth of 5 per cent in revenue and around 30 per cent in both operating profit and bottom line, the report said.
In particular, sectors such as automobiles, including auto ancillaries, textiles, steel, non-ferrous metals, real estate, construction, capital gGoods, and non-electrical equipment, among others, have reported double-digit degrowth across parameters, it added.
The only positive is that sectors such as pharmaceuticals, IT software, healthcare, and gas distribution, among others, reported growth in all key parameters during Q4 FY20, compared to Q4 FY19.
As per initial trends in quarterly results, most sectors had reported negative growth and the department expects the same trend to continue in FY21.
“However, we believe in the current exceptional circumstances, it is futile to look at profit and loss parameters. What will be more important will be to closely observe the balance sheet strength.
“Ideally, corporates with such strength will be able to navigate through these exceptional times,” said Soumya Kanti Ghosh, Group Chief Economic Adviser.
Balance sheet strength has been assessed based on some key parameters ― debt to equity (DE), debt service coverage ratio (DSCR), interest service coverage ratio (ISCR), and cash and bank balance to debt, among others.
While sectors such as automobile, FMCG, and consumer durables though have reported negative growth in all key parameters in Q4 FY20, the report said, they have the requisite balance sheet strength to come out of the current situation.
However, there are sectors such as sugar, steel, telecom services, construction, and realty that do not have the balance sheet strength and may face difficulties in this uncertain period, the report added.
Downgrades
According to Ecowrap, the pandemic has resulted in unprecedented rating downgrades across sectors. There were 182 rating upgrades and 2,996 rating downgrades across sectors during Q1 (April-June) FY21, the report said.
“Further, it is important to understand the current rating downgrades in comparison with the FY14 taper tantrum crisis.
“It may be noted that unlike taper tantrum, almost all sectors face a significant rating downgrade: fertiliser, textiles, automobile, consumer durables, realty, construction, sugar, and capital goods, among others, to name a few,” Ghosh said.
Interestingly, all such sectors have a predominant reflection of consumer demand, and it is thus imperative that policy makers make an effort to give a meaningful push to demand as we meander through the current crisis, said Ghosh.
“Beyond such, it will be futile to ask for a strong rebound or even a modicum of a V-shaped recovery as we might envisage,” he said.
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