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Economic stress created by the pandemic has stalled the deleveraging activities by the private corporate sector during the second half of 2019-20. According to the Reserve Bank of India’s Financial Stability Report, leverage ratios — measured by the debt-to-asset ratio — increased due to higher borrowings.
“Incremental borrowings were used towards creating financial assets (loans and advances to subsidiary/ other companies and financial investments) and not for capex formation, as demand conditions remained muted,” the RBI said.
An analysis of a sample of 3,760 listed non-financial firms (68 PSU and 3,692 non-PSU) during 2015-2019 shows that non-PSU companies deleveraged substantively relative to public sector undertakings. Notwithstanding this improvement in debt profiles, stagnant operating profit-to-sales ratios during the period reflect the challenging business environment. The ratio of interest expenses to operating profits for PSUs was lower compared to non-PSUs.
However, despite significant moderation in interest rates, this ratio has remained sticky for both PSUs and non-PSU companies, indicating interest cost overhang. Both groups also show deteriorating liquidity positions, as measured by the current ratio.
Ratings pressure
The stress on the balance sheet is also seeing higher downgrades by credit rating agencies. On an aggregate basis there was a y-o-y increase in the share of downgraded/suspended listed companies during quarters ended December 2019 and March 2020.
Downgraded/suspended CARE rated debt issues of listed companies went up to 22 per cent of total rating action during the quarter ended March 2020, the highest in the last three years. Crisil-rated downgrades/suspensions witnessed a spike to 17 per cent in the December 2019 quarter but dipped to 9 per cent during the quarter ended March 2020.
“The performance of the private corporate sector deteriorated in successive quarters of 2019- 20 and the contraction during the last quarter was particularly severe due to the Covid-19 pandemic,” RBI said.
Sales, profit profile
During the year, nominal sales and net profits of 1,640 listed private non-financial companies declined (y-o-y) by 3.4 per cent (10.2 per cent in Q4:2019-20) and 19.3 per cent (65.4 per cent in Q4:2019-20), respectively, despite the corporate tax rate reduction of September 2019, which brought down the effective tax rate (ratio of tax provision to profit before tax) by nearly 3.0 per cent y-o-y in 2019-20.
This poor performance was led by the manufacturing companies, as services sector companies, especially those in the IT sector remained in positive terrain, RBI said in its report
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