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News Debt Obligations: Construction, IT And Metal Companies Facing The Heat   Email this page
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BANGALORE: It is not the airline industry alone that is facing the debt wall, but there are several other industries like construction, IT and metal companies that have seen huge erosion in shareholders’ wealth. The worst scenario is that the money some of these companies make from their operations does not even cover the interest payments of their debt obligations, as reported by Rediff.
According to the Credit Suisse Securities report entitled ’Corporate financial health tracker’, 36 percent of the companies that were examined had an interest coverage ratio of less than one, which means their interest payment option is greater than what they earn from their daily operations. The report which examined data for 3,700 firms mainly non-financial companies, and found that their total debt was accounted to $400 billion.

“The share of debt with chronically stressed corporates declined to 26 per cent (in the fourth quarter of 2013-14) versus 31 percent in the third quarter (3Q14). However, the share of debt with companies having an IC less than one for eight consecutive quarters increased to 35 percent versus 29 percent in 3Q14 and the aggregate interest cover worsened marginally to 2.5x,” said authored research analysts Ashish Gupta, Prashant Kumar and Kush Shah.

Deepak Jasani, head of retail research HDFC Securities said, “Mid-scale or small-scale companies have faced a problem due to slowdown in the past few quarters. But if the economy improves, as it is expected to, these companies might see better days. Of the 36 percent, 15-20 percent might not be able to improve on their situation; some others might be able to take advantage of the improved sentiment.” To overcome this issue some of the analysts have suggest equity issuances to retire debt could help. Sandeep Singal, co-head of institutional equities at Emkay Global Financial Services also said that some of the above mentioned measures might pick up in as little as two quarters if implemented. He further added that, “The whole outlook has changed and there is greater investor appetite. One could see 20,000-25,000 crore in fund raising is in the offing, with some of it being used to retire debt. Chemicals and building materials are among the likely sectors.”

Lalit Nambiar, fund manager at UTI Asset Management Company said, “Most of the affected companies are infrastructure ones, also facing cash flow problems. They can get out of it if projects are implemented. Alternatively, they can get in additional equity or the banks that have lent them the money could look to convert their positions into equity.” He further exclaimed that, if banks did so, this would indirectly help other businesses as well. “This frees banks to lend elsewhere and the additional liquidity will help the business cycle.”

The report added that, “While most large corporates have been highlighting plans for de-leveraging, progress on this front has been relatively slow for some of the large announced deals; the cash inflow is in the first quarter of FY15.

For the largest 50 borrowers with IC less than one, debt levels went up by seven percent in FY14 even as Ebitda (operating earnings) dropped by nine percent. Consequently, debt and Ebitda multiples have deteriorated to 14.6x from 12.3x.”

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