As much as Rs 158,500 crore debt of 129 vulnerable companies in textile, telecom and construction sectors is at risk, says a Reserve Bank of India study.
The RBI study has said Rs 72,400 crore debt of five telecom companies is at risk. From the textile segment, 54 vulnerable companies carry Rs 45,700 crore debt at risk. In the construction sector, Rs 40,400 crore debt of 25 vulnerable companies is at risk, the RBI study has said.
The study is based on the performance of the private (non-financial) corporate sector during 2016-17, based on the earnings results of 3,007 listed non-government non-financial companies (NGNF).
“Among companies with a leverage ratio of more than 200 per cent and an ICR (interest coverage ratio) of less than 1 (including companies with negative net worth), the textiles and the telecommunication corporates appeared fragile and debt at risk rose significantly in 2016-17 in these industries,: it said. “The share of debt held by the ‘vulnerable’ construction companies also remained elevated.
A stark contrast was observed in the performance of heavily indebted companies (i.e., those with debt equity ratios more than 200 per cent and debt to total assets ratio greater than 50 per cent in 2015-16) in the manufacturing vis-a-vis the rest of the sample. “Although the indebted manufacturing companies reduced their debt levels in 2016-17, they performed poorly in terms of fixed assets investment (capex), debt serviceability (ICR) and profitability (return on assets), it said.
On the other hand, there was an increase in debt levels of indebted infrastructure companies, resulting in worsening of debt serviceability and profitability. “The issuance of new debt for the infrastructure companies is mainly determined by the internal rate of return (IRR) of the projects undertaken. Listed manufacturing companies tilted their investments towards financial assets and away from fixed assets in view of the persistently low capacity utilisation (CU) and the overall deleveraging witnessed in this sector,” the RBI study said.
The NGNF listed manufacturing companies are classified into three categories of CU (high, medium, low) and two categories of debt serviceability in the base year 2014-15. “Distressed companies liquidated their investment in both fixed and financial assets in 2016-17; among them, companies with higher CU preferred to liquidate fixed assets whereas companies with low CU liquidated financial assets, the study said.
According to the study, low capacity utilisation in the manufacturing sector led to significant deleveraging as well as lower investments in fixed assets, with companies preferring investments in financial and liquid assets. “Deleveraging undertaken by highly indebted manufacturing companies should translate into better risk profile of this sector in the coming years, however, preference of investment channels other than fixed assets by the healthy corporates probably hints at transaction cost motive and subdued credit demand in the economy,” it said.