Friday, March 27, 2015

Debt laden corporate sector and India's recovery

Following on from the dismal story of debt-laden balance sheets of real estate firms, Business Standard has a nice graphic that captures the magnitude of indebtedness in corporate India,
It is not so much the share of corporate debt as percentage of GDP that is frightening. While rising, non-financial corporate debt is still below that in many other large economies. The more worrying parameters are the high debt-to-equity ratios - in highly unsustainable double-digits for some of the largest infrastructure firms - and the low debt-service coverage ratios (DSCR) - at end-2013 nearly 40% of the corporates had DSCR lower than one, or inadequate earnings to cover even interest payments. Add to this the rising exposure to unhedged short-term external debt due to the liberalization of External Commercial Borrowings (ECB) inflows, and corporate India has to navigate very strong headwinds.
Their high indebtedness, and the resultant applications for corporate debt restructuring has led to many of the largest infrastructure companies from being barred from bidding for new projects. Of the 45 core infrastructure companies, 20 are currently in CDR and have been barred from contracts in many states. It is not just infrastructure, automobile sales, especially those of cars, has been stagnant for five years. With interest rates being sticky downwards, the sales growth of consumer durables and vehicles face a daunting challenge.

Corporate de-leveraging is therefore an essential requirement. But it runs counter to the government's expectations that predominantly privately financed infrastructure spending will do the heavy lifting for restoring economic growth to near double-digit rates. In any case, with banks hobbled with rising non-performing and distressed assets, credit availability for corporate India looks extremely uncertain. 

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