With growth rates slowing and global concerns not abating, the Street is increasingly becoming worried about rising stress levels for corporate India.
Earlier, Credit Suisse had come up with a report on the risks faced by the banking sector due to its exposure to highly-leveraged corporate houses. Today, Morgan Stanley’s team of analysts, led by Ridham Desai, put out a report indicating a list of companies which could face balance sheet stress, based on their quantitative analysis.
Based on its proprietary Altman Z-score and cash flow tests, the brokerage says 20 companies appear stressed on the cash flow measure. When they combined the results of the Z-score and cash flow stress tests, five companies have these in common -- Adani Enterprises, Adani Power, Jaiprakash, ITNL and Lanco.
| UNDER STRESS COMPANIES WITH Z-SCORE LESS THAN 1.81 | |
| Company | Altman’s Z Score |
| Hathway | 1.78 |
| Adani Ports and SEZ | 1.71 |
| Shree Renuka Sugars | 1.68 |
| Great Eastern Shipping | 1.68 |
| Educomp Solutions | 1.59 |
| Adani Enterprises | 1.53 |
| Bharti Airtel | 1.53 |
| Jaiprakash Associates | 1.48 |
| JSW Energy | 1.43 |
| Cox and Kings | 1.41 |
| ITNL | 1.39 |
| IRB | 1.36 |
| Aditya Birla Nuvo | 1.29 |
| Power Grid | 1.11 |
| Lanco Infratech | 0.88 |
| Indiabulls Power | 0.64 |
| Adani Power | 0.52 |
| A Z score below 1.8 implies an increased probability of financial stress. Source: Morgan Stanley Research | |
| CASH FLOW STRESS | |
| Company | Cashflow score * |
| Lanco Infratech | -2.08 |
| Balrampur Chini Mills | -1.18 |
| Adani Power | -1.14 |
| IVRCL | -0.97 |
| Jain Irrigation | -0.89 |
| ITNL | -0.78 |
| NCC | -0.72 |
| Godrej Properties | -0.47 |
| Shree Renuka Sugars | -0.39 |
| Jaiprakash Associates | -0.37 |
| Assuming refinancing becomes a problem; * Score is based on Operating Cash Flow minus Net Repaymet Liabilities / Book Value Source: Morgan Stanley | |
Altman Z-scores measure the risk of bankruptcy; the cash flow stress test is to assess refinancing risk. The analysts have assumed refinancing will not be available and, hence, any loans taken by the companies will need to be financed out of operating cash flows. The study is based on 2011-12 numbers and Morgan Stanley’s own FY13 estimates.
Of the 104 stocks under Morgan Stanley’s coverage, 17 companies which had an Altman Z-score of 1.8 are seen to be at financial risk (see table). Another seven are considered borderline cases. These include: Tata Power, Indiabulls Real Estate, DLF, JSW Steel, Hindalco, Reliance Infrastructure and NTPC.
Most of these stocks underperformed over the past 12 months, but mere underperformance does not mean that all the potential pain is priced in. “And, hence, these tests still should be of use,” says the report.
Over the past five years, several Indian business houses have borrowed substantial amounts of money to fund projects and acquisitions. With economic growth slowing and interest rates remaining high, corporate India is finding it very hard to generate adequate cash flows to service their pile of debt. Most companies which have borrowed heavily in the past have a very poor interest coverage ratio, which indicates their low ability to repay debt.
However, the situation could change. “Balance sheet stress is a cyclical thing in stock picking – it comes to the fore in a rising rate and slowing growth environment. The market’s preference for quality will shift if rates soften further and growth bottoms out,” the anlysts note
Morgan Stanley’s stress test analysis does not throw up any new name or sector. However, it does reiterate the severe stress that not only corporate India faces but also the banking system. At the sector level, it says: “Not surprisingly, real estate, utilities, industrials and telecoms appear to carry maximum financial and cash flow risks, based on our metrics.” All these sectors have been at the centre of either scams or policy logjam.