High-debt companies face risk of default amid coronavirus spread: Analysts

CFOs, analysts say moratorium on interest is key to tide over crisis

Some of India’s highly indebted companies will find it difficult to service interest payments on loans if the Centre does not offer moratorium on interest payments for the next six months, say leading chief financial officers and analysts.

Analysts said while some companies like Reliance, Larsen & Toubro, and Tata Steel will be able to meet their liabilities due to adequate cash flow, telecom, airline, real estate, and automobile companies will find it difficult to meet interest liabilities. A moratorium on interest payments will help companies pay their suppliers and keep the cycle running.

“There should be additional working capital funding to meet cash flow gaps and moratorium of at least six months in repayment and interest,” said Seshagiri Rao, group managing director, JSW Steel. “The situation on the ground is very bad due to coronavirus,” said Prabal Banerjee, group finance director, Bajaj Group. “There should be moratorium on principal repayment for two years and interest payments for the next six months for corporates.  The net present value of loans should also be protected by adjusting the rate of interest, so that banks do not suffer,” he said.

Analysts said several sectors are in trouble as their sales dwindled due to COVID-19 pandemic and the subsequent shutdown across India. “Sectors such as real estate, automobile, etc will also see pressure due to stretched working capital position and muted top line,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Inventory and debtors are a third, or 33 per cent, of net sales and higher for sectors like real estate (over 80 per cent) in a normal business cycle. This ratio could go up due to the current situation, thus, indicating working capital pressure.

Besides high leverage position, firms with elevated promoters pledging will have difficult times. “This will warrant asset sale to service debts in some cases,” cautioned Chokkalingam.

“Companies that stand leveraged at 2.5x or more debt-to-equity may face pressure if the current lockdown spills over to the next quarter. The inability to produce/supply and the lack in demand will have a telling impact on the financial health of overleveraged firms. The current shutdown will impact profitability where fixed costs are high. Companies and sectors like cement, where variable costs are 80 per cent, will see smaller impact,” said Vinay Pandit, head-institutional equities, IndiaNivesh.

“The government and the Reserve Bank of India should consider relaxing non-performing asset recognition for the interim, which will ease the stress on corporates, banks, and non-banking financial companies,” added Pandit.

(With inputs from Krishna Kant)