Three years of high interest rates, low earnings growth and generally depressed economic conditions have placed a great deal of stress on India Inc's balance sheets. There was a record amount of loan restructuring in the past three quarters. All this means the banking system is also under great pressure.
According to a recent report by India Ratings & Research, there is a huge concentration of risk. Between them, the top 100 companies (excluding financial companies and PSUs) owe 46 per cent of all bank exposure to the industrial sector. About Rs 2 lakh crore is due for refinancing or repayment within the next 15 months. This amounted to 29 per cent of the net worth of the banking system on March 31, 2013.
Of these top 100 companies, 26 are estimated to have strong balance sheets and will face no problems in retiring or refinancing debt. Another 12 companies have good enough credit ratings to be able to refinance at reasonable cost, even in difficult conditions. Another 22 companies will be able to refinance, although they could be paying higher interest rates.
Fitch reckons some 20 companies have elevated risk, in that they will face some difficulties in refinancing. Their credit ratings are unimpressive. Another 20 companies are already in distress - they have undergone some form of default or made restructuring requests. This last category has loans amounting to four- five per cent of the banking sector's net worth.
The last two categories, the 40 companies already in distress or facing elevated risk, also have more limited refinance options. They cannot go abroad for funds due to the exchange risk and weak balance sheets. Quite a few of the stressed businesses already have foreign currency convertible bonds exposure.
In many cases, promoters have already pledged substantial shareholdings. The moribund state of the primary market also makes it difficult or impossible for them to issue more shares to raise cash. Some, if not all, of these companies will have to make restructuring requests and many would be looking to deleverage via asset sales. They would also be very vulnerable to either a trend of higher interest rates or any further deterioration in operating margins.
The exposure can also be grouped under industry. Construction, including engineering and infrastructure, constitutes 25 per cent of the total refinancing required, steel another 12 per cent, telecom 10 per cent and automobiles another five per cent. Power, auto ancillaries, real estate and diversified manufacturing also have high exposure, with each constituting around four per cent of the total refinancing requirement. There is a high core sector and infra focus. Textiles and airlines also show up in the elevated risk and stressed categories.
The stressed companies include Lanco Infratech, Suzlon, Aban Offshore, GTL Infra, Hindustan Construction, IVRCL, Era Infra, GTL, GOL Offshore - a large dose of infrastructure. Jet Airways and Kingfisher Airlines also feature in that list and the latter is probably a write-off. Others include Hotel Leela, Essar Steel, Jindal Stainless, Electrosteels, Gujarat NRE, Madhucon Projects and Moser Baer. Most of this list is heavily dependent on a pick-up in the pace of activity across infrastructure sectors and a rising demand for steel, and so on.
Unless there's dramatic improvement in the business cycle within FY15, it's odds-on that many of these stressed companies will not be able to manage their debt satisfactorily. If there are a few spectacular defaults, the banks with specific exposure could come under heavy selling pressure. It is equally true that some of these companies will manage turnarounds and thus, bring their debt under control. In those cases, they will be multi-baggers. Keep an eye out for action and news flow in these stocks.
