Earnings of large companies are going to come under the scanner this season. Over the last few quarters, banks have seen a sharp build-up in bad loans as companies are struggling to service debt with growth slowing down and interest rates staying high. So far, the slippages (fresh accretion of bad loans) have been secular. With rates staying high and economic growth plummeting over the last few quarters, analysts expect large accounts to turn bad in a big way.
This is why banking analysts at brokerages like Credit Suisse and Barclays have been steadily dissecting the cash-flows of large corporates, which have borrowed large sums of money from Indian banks to fund capital expenditure, to highlight the possibility of any systemic risk. Some of these large companies are not generating enough cash to service their debt. Barclays has done a three-part series on operating cash flows of large borrowers. The brokerage says that 100 companies account for 70 per cent of the debt of all listed companies (3,000). The analysis shows that the large companies (which already have huge debt on their books) continue to borrow to fund capex even as operational cash flows remain weak or negative.
Cash flow analysis of another 13 companies done by Barclays reflects another worrying trend. The operating free cash-flows of these companies are even lower than that of previous ones and six out of 10 had negative cash flows. However, two companies (Madhucon Projects and Lanco Infra) have reported positive by “dramatically” extending payables. Anish Tawakley of Barlays says in a report: “In aggregate, 31 industrial companies we analysed have accounted for 29 per cent of incremental industrial lending of the entire banking system. The borrowing is for capex and not working capital.”
It’s not surprising then that the Street is bracing for several tough quarters for banks as both slippages and restructuring will remain high. Unless interest rates are cut this quarter, many more companies will head for the corporate debt restructuring cell. In the first quarter of FY13, banks restructured assets worth Rs 18,000 crore and the second quarter is likely to see a similar run rate. The Street is expecting State Bank of India to report slippages of Rs 6,000-7,000 crore in Q2 and restructure assets worth Rs 2,000 crore. Evidence of large borrower stress has become apparent with Suzlon, which defaulted on its FCCB payouts. The company has a debt of Rs 18,000 crore and of this SBI’s exposure is Rs 1,800 crore.