India Ratings and Research (Ind-Ra) believes that the balance sheet improvements registered by the top 400* listed corporates by revenue (and 70% of the debt of all listed entities, 85% when adjusted for entities already in default) in FY21 would sustain, reflecting a structural shift from a decade of balance sheet leverage. While the top 50 corporates by revenue (above INR200 billion) which are rated at the top end of the rating scale exhibited resilience during FY21, the real improvement has played out across the next set of 350 corporates (revenues below INR200 billion). These corporates have not only showed resilience but also emerged stronger through cost and working capital reductions, which in Ind-Ra’s opinion are likely to sustain in FY22 and thereafter. Corporate cash flows across the spectrum have also benefited from the significant reduction in tax outflows on account of the lower corporate tax regime, the full benefits of which were realised in FY21.

 Rating Upgrades Reflect Structural Shifts: Ind-Ra’s recent rating actions across Large Corporates have shown a sharp decline in the ratio of downgrades to upgrades. The positive rating actions have been prominent in the category of 350 companies (revenues below INR200 billion). This partially reflects a better-than-expected performance in FY21, but more fundamentally Ind-Ra’s expectation that these entities will continue to sustain the significant improvement in balance sheets over the course of FY22 and beyond. On the other hand, entities which have revenues above INR200 billion and rated in the IND AA and IND AAA categories have continued to exhibit resilience, as reflected in their stable credit profiles. 

Drivers for Improvement Sustainable:
The key drivers for improvement in credit profile in the case of the top 400 corporates has been the usage of additional cash for debt reduction, setting the stage for a lower interest outgo in FY22 and thereafter, with most of the debt reduction coming through in 4QFY21. This has been aided by a significant reduction in the working capital cycle resulting from tighter credit terms, increasing usage of bill discounting (non-recourse to the balance sheet), a belief that operations can sustain seamlessly even with lower inventories and an ability to squeeze creditors, given the increasing bargaining power from market share gains. While tax benefits have permeated to all corporates, benefits of cost reductions especially those which are discretionary in nature (linked to administrative expenses etc) are likely to sustain, more specifically for the set of 350 corporates. This obviously means that there is also bound to be working capital expansion for corporates catering to these large entities. 

Leverage Levels Unlikely to Increase Substantially:
Ind-Ra expects large entities to start looking at capital expenditure plans sooner than later, especially in sectors which are benefitting on account of an export surge. While this could entail additional balance sheet debt, there is a perceptible shift in the gestation period and quantum of these capex plans compared to the last decade when the corporate balance sheets grappled with leverage issues for the entire decade. While historical capex plans had gestation periods of three years or more, most sectors in today’s environment are looking at either short-duration capex or capex which can be implemented in modules to improve the turnaround of cash flows and limit the risk of cost and time overruns. Ind-Ra believes the increased consciousness to short-tenured capex is driven by the changing dynamics of capex in certain sectors viz. renewables in power have a gestation period of nine to 12 months compared to thermal power which takes five to six years, and sponsors’ increasing focus to keep balance sheet leverage under control, or otherwise risk losing control of businesses under the Insolvency and Bankruptcy Code.   

Margins Headwinds; Refinancing Exists for Certain Sectors:
Ind-Ra believes that commodity producers would continue to benefit and some of that benefit will negatively impact consuming sectors. Although the benefits from other aspects of the P&L and working capital accrued in FY21 for these large corporates are still likely to sustain, in certain sectors such as engineering, procurement and construction and power, reduction in receivables on account of counterparties is still a work in progress. This is despite the  overall direction seeming favourable, given the implementation of the Atmanirbhar package for Discoms. Some of the entities and sectors such as engineering, procurement and construction, power and telecom, media and technology  would also remain exposed to a large-scale refinancing risk in FY23 and could face challenges if liquidity conditions were to tighten.
 

Figure 1
Top 50 Corporates by Revenue

Aggregate (INR trillion)

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

Sales

29

33

37

37

33

38

43

51

50

46

EBITDA

4

4

5

5

5

6

6

7

7

8

Capital raise

0

0

0.2

0.1

0.1

0.1

0.2

0

0.8

2.2

Net cash generation

-1

-1.3

-1.8

-0.9

0.4

-1.3

-2.1

-3.6

-1.5

2.5

Net debt

5.1

6.5

8.3

9.1

8.7

10

12.1

15.7

17.2

14.7

 

 

 

 

 

 

 

 

 

 

 

Capex/sales (%)

8

8

8

8

9

9

8

8

7

8

Dividend/PAT (%)

29

33

34

50

46

47

55

58

111

57

Cash flow from operations/EBITDA (%)

67

75

88

88

95

88

82

65

87

96

EBITDA (%)

13

12

13

13

15

15

15

14

13

17

Gross margins (%)

37

37

40

43

50

49

46

45

46

51

Working capital cycle (days)

28

26

22

22

18

21

17

20

24

19

Tax rate (%)

26

29

28

33

33

29

25

32

41

22

 

 

 

 

 

 

 

 

 

 

 

Aggregates (x)

 

 

 

 

 

 

 

 

 

 

Net debt: Equity

0.81

0.85

0.9

0.94

0.81

0.83

0.82

0.9

0.98

0.81

Net leverage

1.38

1.67

1.71

1.86

1.81

1.78

1.93

2.19

2.54

1.81

Gross interest coverage

7.2

6.2

5.9

5.5

5.4

5.8

5.7

5.1

3.9

4.9

 

 

 

 

 

 

 

 

 

 

 

Median (x)

 

 

 

 

 

 

 

 

 

 

Net debt: Equity

0.27

0.44

0.4

0.49

0.25

0.25

0.41

0.45

0.49

0.17

Net debt/EBITDA

0.98

1.45

1.32

1.28

1.03

0.83

1.36

1.72

1.34

1

Gross interest coverage

8.02

5.92

6.88

7.56

6.73

9.1

6.91

5.1

4.16

7.71

Source: Ace Equity, Ind-Ra

 

Figure 2
The Next 350 Corporates by Revenue

Aggregate (INR trillion)

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

Sales

9.4

10.4

11.6

12.6

12.8

13.7

15.2

17.4

17.5

16.8

EBITDA

1.6

1.6

1.8

2

2.1

2.3

2.4

3

2.9

3

Capital raise

0.1

0.2

0.1

0.1

0.1

0

0.2

0.2

0.2

0.3

Net cash generation

-0.6

-0.4

-0.5

-0.1

-0.4

-0.1

0.2

-0.7

0.3

1

Net debt

2.3

2.7

3.1

3.3

3.7

3.8

3.5

4.2

3.9

2.9

 

 

 

 

 

 

 

 

 

 

 

Capex/sales (%)

11

11

8

7

8

8

7

7

8

6

Dividend/PAT (%)

30

31

48

43

45

48

46

39

50

41

Cash flow from operations /EBITDA (%)

62

67

71

66

71

77

69

53

82

96

EBITDA (%)

17

16

15

16

16

17

16

17

17

18

Gross margins (%)

58

60

59

60

61

62

61

61

62

62

Working capital cycle (days)

84

87

83

83

91

87

72

72

74

60

Tax rate (%)

30

32

33

33

33

30

31

30

29

24

 

 

 

 

 

 

 

 

 

 

 

Aggregates (x)

 

 

 

 

 

 

 

 

 

 

Net debt: Equity

0.71

0.73

0.74

0.72

0.71

0.66

0.6

0.6

0.58

0.5

Net leverage

1.46

1.63

1.78

1.64

1.76

1.65

1.45

1.41

1.35

0.97

Gross interest coverage

5.4

4.8

4.2

4.4

4.3

4.4

4.6

5.1

4.4

5.1

 

 

 

 

 

 

 

 

 

 

 

Median (x)

 

 

 

 

 

 

 

 

 

 

Net debt: Equity

0.33

0.31

0.22

0.19

0.17

0.16

0.1

0.06

0.04

-0.05

Net debt/EBITDA

1.15

1.29

0.87

0.75

0.61

0.59

0.31

0.37

0.19

-0.24

Gross interest coverage

5.49

6.18

6.49

7.6

8.55

10.36

11.3

11.96

9.84

13.65

Source: Ace Equity, Ind-Ra

 
* These include entities from not only capital-intensive sectors such as oil & gas, power, auto, steel, engineering, procurement and construction, but also pharma, fast moving consumer goods which have low reliance on debt.

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Analyst Names

  • Vivek Jain

    Director
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    +91 124 6687249

    Rakesh Valecha

    Senior Director - Core Analytical Group
    +91 22 40001740

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121