Defaults show India Inc still parched

Companies continue to be under pressure due to stretched finances and slack demand despite the fact that access to funds has improved since the beginning of the financial year, according to rating agencies.

As many as 14 companies rated by Crisil defaulted between April and July this year, up from 13 in the whole of 2008-09. This is the highest number of defaults recorded by Crisil since 1999 which saw 27 defaults.

Over the three-year period ended March, 2008 there wasn’t even a single default.
Crisil analysts say the defaults should be seen in the light of an increase in companies rated in the last one year. Crisil has about 2,800 outstanding ratings, 1,500 of which were added in the last one year.

Non payment of loans/ debt even for a day more than the due date attracts a default ‘D’ rating from Crisil, unless the loan is restructured by the bank before the due date. 
Ajay Dwivedi, director, Crisil Ratings, said defaults are likely to continue and increase further by the fiscal end.

“Defaults may accelerate as pressure on credit quality forces weak companies to default. Moreover, the credit profiles of Indian companies remain vulnerable to demand uncertainty. This is especially true for companies that earn significant revenues from rural markets, which are exposed to the effect of drought this year,” he said.

Raman Uberoi, senior director at Crisil ratings said defaults may rise also because many more companies are on the edge as their requirements and availability of funds are just about matched currently.

“There could be an increase in defaults some from the textile sector or sectors allied to real estate. Balance sheet of some companies is tight and hence they are rated at sub investment grade ‘BB’. They may have good order books currently but their balance sheet is stretched too thin,” he said.

Crisil said that the pressure on credit quality has reduced but that does not mean that credit strength of companies is back.

Corporate access to funds has improved since April as bank rates have come off due to rate cuts by the Reserve Bank of India, increased availability of international funds and improved sentiment in the local equity market.

“Total interest expenses for 403 non-financial companies in the S&P CNX 500 index dropped by 5% in the March 2009 quarter, and by another 12% in the June 2009 quarter, compared with the respective preceding quarters,” Crisil said. Companies borrowed $2 billion through external commercial borrowings in June, the highest since September 2008, it added.

However, demand for corporate goods and services will continue to be under threat due to a drought this year. Volatility in exchange rates and uncertainty in interest rate movements will also pressure companies.

Between April and July, Crisil upgraded ratings on 13 and downgraded 90 entities compared with 81 downgrades and just a single upgrade in the six months ended March.

Downgrades are expected to continue to be more than upgrades for the rest of the year.
The trend is similar for other rating agencies.

ICRA has downgraded 52 entities between April-July and upgraded only 13, compared to 60 downgrades and two upgrades last year. ICRA didn’t share data of companies which defaulted.

Care has downgraded 46 entities so far this year and upgraded only six compared to 47 downgrades and nine upgrades for the whole of last year. Care said it had seen no defaults this year.

Naresh Takkar, managing director at ICRA said liquidity for companies has improved but some sectors like real estate and export dependent textile sector remain under pressure.

Rajesh Mokashi, executive director with Care Ratings said the situation has improved since October-December last year. “Signs from the reviews indicate that downgrades have bottomed out, but we are still not even half way through this financial year, so let’s wait and watch,” he said.