Stressed debt across sectors falls 37% in Q2 to Rs 15 trn: Credit Suisse

The gradual opening of the economy after a stringent lockdown imposed by the rampant spread of Covid-19 has proved to be a boon for companies, especially the ones saddled with debt. A November 19 report by Credit Suisse’s Ashish Gupta, their managing director and head of equity research for India, along with Kush Shah and Jayant Kharote says the stressed debt across sectors dropped 37 per cent to Rs 15 trillion in the second quarter of the current fiscal (Q2FY21) from Rs 23.8 trillion in Q1FY21.

The share of debt with loss-making companies was also down to 23 per cent as compared to 28 – 30 per cent pre-Covid-19. A large part of this has been on account of the fall in the stressed debt levels in the metal (Tata Steel & SAIL) and telecom (Bharti Airtel) sectors, Credit Suisse said.

While the overall stressed debt dropped across sectors 37 per cent QoQ, the quarter also saw the share of stressed debt with companies having interest coverage ratio of less than 1 (IC < 1) reduce sharply to 35 per cent QoQ, the best in the past five years.

“The share of debt with companies having IC < 1 dropped sharply by 35 per cent, the best in the past five years and was even lower than the pre-Covid-19 levels of 40 – 45 per cent,” the note said.

A part of this was expected, the Credit Suisse analysts said, post the large spike seen in Q1FY21 when it moved up to 56 per cent on the back of stringent lockdowns. However, the exit of auto companies (Mahindra & Mahindra, Motherson Sumi, and TVS Motor), as well as Larsen & Toubro (L&T), provided relief.

The interest coverage ratio is used to determine how easily a company can pay its interest expenses on outstanding debt. Simply put, the ratio is used to measure how many times a company can cover its current interest payment obligations with the available earnings and measures safety margin, or cushion, a company has for paying interest on its debt during a given period.

A ratio of less than 1 indicates the company is not generating sufficient profit to meet its interest obligation. In such a case, it is likely to spend some of its cash reserves in order to meet the shortfall or borrow more in order to service the debt.

Telecom, metals to the rescue

The share of debt with IC < 1 in the telecom sector has also reduced to 15 per cent, as Bharti Airtel has exited the list, post several quarters of steady improvement. “The power sector saw some improvement; however, plant load factor (PLFs) remain low at 52 per cent and adjusting for one-offs Adani Power and Reliance Power continue to have IC of less than 1," the Credit Suisse note said.

Given this, Credit Suisse expects banks to benefit going ahead. Moderation in credit costs post the spike in the first half of the year, Credit Suisse said, is expected to drive return on equity (ROE) recovery in Axis Bank, ICICI Bank, HDFC Bank, and State Bank of India (SBI) from the second half of the year. These banks remain Credit Suisse's preferred picks in the financial sector.

That said, Vodafone Idea, Tata Motors, Adani Power, Alok Industries, GMR Infrastructure, NLC India, Reliance Power, MTNL, Interglobe Aviation, and Jaiprakash Associates are among the top 50 companies Credit Suisse lists as chronically stressed with an interest coverage ratio of less than 1, based on their FY20 gross borrowing.