TheNFAPost Podcast

Amritsar, NFAPost: Corporates with adequate balance sheet strength are expected to sustain the hit from Covid-19 pandemic, which has affected all sectors at large, State Bank of India’s research report ‘Ecowrap’ has shown.

According to the report no sector is untouched with the impact of Covid-19, and subsequent lockdowns even after opening up will prolong the economic pain.

The report pointed out that in the current exceptional circumstances, it is pointless to look at profit and loss parameters. 

“What will be more important is to closely observe the balance sheet strength. Ideally, corporates with such strength will be able to navigate through this exceptional times,” it said.

SBI in its report has considered balance strength of various sectors based on some key parameters such as debt-to-equity (DE), debt service coverage (DSCR), interest service coverage ratio (ISCR), and cash and bank balance to debt.

Industries such as automobile, FMCG, consumer durable though have reported negative growth in all key parameters in the Jan-Mar quarter of financial year 2019-20, have the requisite balance sheet strength to come out from the current situation, the report said.

While the automobile sector has a DE ratio of 0.20 and DSCR and ISCR of 1.57 and 5.56 respectively, the consumer durable sector has a DE of 0.25 and DSCR and ISCR of 4.77 and 8.93 respectively, according to the report.

The sectors that do not have balance sheet strength and are likely to face difficulties in this uncertain time include sugar sector, steel industry, telecom services and constructions, among others, the report said.

For example, the sugar sector, which has not been performing well, is also having high DE of 1.58 and low DSCR and ISCR of 1.03 and 1.52 respectively.

The report said sectors such as construction, and textile have DSCR and ISCR that are sharply low, which shows the weak repayment capacity of loan as well as interest. Within such sectors also there may be some corporates with higher DE as compared to others and may be affected more, it added.

The report said the pandemic has resulted in unprecedented rating downgrade across sectors. There were 182 rating upgrades and 2,996 rating downgrades across sectors during Apr-Jun of the current financial year, it said.

In capital goods sector, a massive 870 downgrades was seen as compared to only 50 upgrades in the first quarter of the current financial year.

Construction, textile, steel, reality, auto ancillary, gems and jewellery have reported huge downgrades during the period as compared to very small or no upgrades.

“In terms of rating downgrades, it seems the current crisis is unprecedented and it is important to look at corporates within sectors that have adequate balance sheet strength” the report said.

Further, it is important to understand the current rating downgrades in comparison with the FY14 taper tantrum crisis.

“It may be noted that unlike taper tantrum, almost all sectors face a significant rating downgrade: fertiliser, textiles, automobile, consumer durables, realty, construction, sugar, and capital goods, among others, to name a few,” SBI Group Chief Economic Adviser Soumya Kanti Ghosh said.

Interestingly, all such sectors have a predominant reflection of consumer demand, and it is thus imperative that policy makers make an effort to give a meaningful push to demand as we meander through the current crisis, Ghosh said.

“Beyond such, it will be futile to ask for a strong rebound or even a modicum of a V-shaped recovery as we might envisage,” he said.

LEAVE A REPLY

Please enter your comment!
Please enter your name here