The number of new cases admitted under the insolvency process in FY2022 at 834 was well below around 2,000 cases admitted in FY2020, but the haircut scenario is not very encouraging, according to a Kotak Securities Ltd (KSL) report.
The report noted that going by the quality of cases getting admitted, the impact of the pandemic and the economic slowdown on corporate India looks fairly comfortable.
Corporate India is likely to take a cautious approach towards taking debt and would prefer to keep the focus on cash flow over growth, according to the report.
“The direction of (Insolvency and Bankruptcy Code) cases is likely to undergo a change as stress is far less than initially feared.
“The higher number of cases essentially reflects the segment most impacted by Covid, which is a lot more in the mid and smaller enterprises.” KSL analysts M B Mahesh, Nischint Chawathe, Abhijeet Sakhare, Ashlesh Sonje and Dipanjan Ghosh said in the report.
They observed that with big players in corporate India in the best shape, outstanding claims are likely to come off sharply in the near future. However, IBC is gaining prominence as reflected by the claims filed.
The analysts assessed that of the 3,406 cases that were closed till FY2022, nearly 47 per cent were resolved through liquidation, while only 14 per cent of the cases were resolved with an average haircut of about 70 per cent on admitted claims.
The total amount of debt resolved through the IBC, at about Rs 6.8 lakh crore, has subsequently slowed in recent quarters, the report said.
Haircut scenario: not very encouraging
However, based on the available data for all cases resolved, financial creditors have faced a haircut of about 70 per cent on admitted claims.
“The amount yielded on resolution as a percentage of liquidation value is high (about 170 per cent). The haircut for cases resolved in 4QFY22 was high at about 90 per cent. The overall haircut scenario is not very encouraging.
“As we work through some of the weaker assets where there are incomplete projects or sectors, which are seeing poor demand from buyers, the realisation values have started to come down,” opined the analysts.
Of the cases admitted till FY2022, 40 per cent were from the manufacturing space, 20 per cent from real estate and about 10 per cent each from construction and the retail trade.
The time taken to resolve is still high, but is reducing from the peak levels seen in 2QFY21, they said.
As of FY2022, about 66 per cent of the ongoing cases have passed 270 days since admission, with another 5 per cent crossing 180 days. Hence, the number of cases facing liquidation is likely to stay high
Of the cases admitted so far, about 50 per cent were initiated by operational creditors, and about 40 per cent by financial creditors, the report said. The analysts said they see operational creditors leading the cases admitted.