HIGH-DEBT FIRMS HEAVE A SIGH OF RELIEF STRICT PARAMETERS A CHALLENGE: AIRLINE EXECS
KAMATH PANEL RECOMMENDATIONS: INDIA INC REACTS
High-debt companies, which witnessed a massive fall in their cash flow due to the coronavirus (Covid-19) pandemic, heaved a sigh of relief as the Kamath panel identified crucial areas in transport and manufacturing sectors for immediate relief.
However, the report is considered ‘too rigid’ by chief executive officers (CEOS) due to various strict parameters prescribed by the committee to become eligible to get the relief.
“Some of the parameters for borrowers needs to be relaxed,” said the CEO of a large NBFC.
India Inc leaders are also keenly watching developments in an ongoing case in the SC, which is hearing the ‘interest on interest’ during moratorium, and is expected to give its order soon.
The report has identified power, construction, steel, retail and real estate sectors among 26 that need relief.
“It’s good news for retail companies like Future Retail, which saw its cash flows dry up due to corona and had defaulted on loans, ultimately leading to its sale to RIL. With this, it can go ahead with debt restructuring,” said an analyst with a brokerage. The entire transport and hospitality sector, including auto, aviation, hotels and airlines, will also get relief, as per the report.
The relief is important for India Inc as in the first quarter of fiscal 2021, the aggregate net sales of the top 1,670 companies fell sharply by 25.3 per cent while the net profits declined by almost 60 per cent (YOY). Of this, nearly 35 per cent of the companies reported de-growth in net sales of more than 50 per cent.
Barring a few sectors, such as telecom and pharma, the drop in net profits has been significantly lower by 29.4 per cent in the June quarter. Despite partial opening up, Indian companies are not expected to perform very well in the September quarter, say analysts.
In order to identify weak firms, the panel has uniformly proposed thresholds for current ratio, DSCR (debt service coverage ratio) and ADSCR (average debt service coverage ratio) in most of the sectors. The borrowers, eligible under the current framework, are standard accounts and as such, they may require some time to restore their position to pre-covid-19 levels. Real estate analysts said the relief will come at the project level and not at the company level. Several high-debt firms such as Lodha Developers will be beneficiaries of the scheme.
In the roads sector, the panel said financing is cash flow based, and at the SPV (special purpose vehicle) level, the level of debt is decided at the time of initial project appraisal.
The working capital cycle in this sector is negative. Accordingly, ratios like debt/ earnings before interest, taxes, depreciation and amortisation (EBITDA) and current ratio may not be relevant at the time of restructuring in this sector.
Since cash flows of several projects are by way of annuity payments, the threshold ADSCR has been kept at 1.10.
The report said the DSCR and average DSCR are not ascertainable for the trading business as most of the firms do not use long-term debt to fund their operations and are unlisted.