Stressed corporates could derail the overall investment recovery for another two-to-three years in the wake of moderate consumption demand, global overcapacity and working capital disruptions due to the goods and services tax, India Ratings has said.
“75 stressed corporates, which registered negative 11 per cent capex growth for FY12-17 and are from key investment-linked sectors, such as metals and mining, infrastructure, and power, may not even be in a position to incur maintenance capex. Thus, they are likely to drag down the investment recovery for another 2-3 years,” it said in a study on India Inc’s investment cycle. The 75 stressed corporates represented 20 per cent of the total capex spending over FY12-17, with a capacity utilisation of 40-50 per cent.
Gross non-performing assets of banks are over Rs 8,29,000 crore. The banking sector’s total stressed assets are expected to increase to 13-15 per cent of total loans by end March 2018.
The majority of stressed corporates would require another 4-5 years to deleverage to a sustainable level of 4-5 times from their current leverage of 9-10 times, provided the economic and financial activity reaches the FY09-12 level. However, at the current level of economic activity, it could take another 10-11 years for such corporates to deleverage to a sustainable level.
“In a scenario where overall capacity utilisation (aggregated for the top 200 capex spenders) continues to remain at 60-65 per cent, the 5 times median net leverage (highest since FY05), muted demand growth and weak pace of nominal growth recovery (resulting in low EBITDA), capex activity may not revive even in the next seven-nine years,” India Ratings said.
There are pockets of stress within sectors, especially infrastructure, metals and power (particularly thermal) owing to high leverage and weak cash flow, limiting their ability to incur large-scale, debt-funded capex. These sectors witnessed a significant decline in capacity utilisation (20-30 per cent deterioration from the peak FY06 levels (80-90 per cent)). “Until these core sectors focus on deleveraging or significant equity infusion, they are unlikely to make significant efforts towards capacity expansion. However, sectors with comparatively low leverage and higher capacity utilisation, such as oil and gas, auto and telecom, could incur marginal capex growth over FY18-20,” it said.
Over FY18-20, while capex growth would be muted, overall corporate sector investment would grow by Rs 1,00,000 crore (5-8 per cent growth), primarily in the form of maintenance capex, according to India Ratings estimates. “Corporates are likely to show an unwillingness to invest in long-term projects due to muted demand and significant leverage, despite a low interest rate environment,” it said.