With cash flow
pressure and high rates, many big names seem to be facing financial risk, warn
its analysts realty, telecom and utilities among sectors in question
With growth rates
slowing and global concerns not abating, the Street is increasingly becoming
worried about rising stress levels for corporate India.
Suisse had come up with a report on the risks faced by the banking sector due
to its exposure to highly-leveraged corporate houses. Today, Morgan Stanley’s
team of analysts, led by Ridham Desai, put out a report indicating a list of
companies which could face balance sheet stress, based on their quantitative
Based on its
proprietary Altman Z-score and cash flow tests, the brokerage says 20 companies
appear stressed on the cash flow measure. When they combined the results of the
Z-score and cash flow stress tests, five companies have these in common
Adani Enterprises, Adani Power, Jaiprakash, ITNL and Lanco.
measure the risk of bankruptcy the cash flow stress test is to assess
refinancing risk. The analysts have assumed refinancing will not be available
and, hence, any loans taken by the companies will need to be financed out of
operating cash flows. The study is based on 2011-12 numbers and Morgan
Stanley’s own FY13 estimates.
Of the 104 stocks
under Morgan Stanley’s coverage, 17 companies which had an Altman Z-score of
1.8 are seen to be at financial risk (see table). Another seven are considered
borderline cases. These include: Tata Power, Indiabulls Real Estate, DLF, JSW
Steel, Hindalco, Reliance Infrastructure and NTPC.
Most of these
stocks underperformed over the past 12 months, but mere underperformance does
not mean that all the potential pain is priced in. “And, hence, these tests
still should be of use,” says the report.
Over the past five
years, several Indian business houses have borrowed substantial amounts of
money to fund projects and acquisitions. With economic growth slowing and
interest rates remaining high, corporate India is finding it very hard to
generate adequate cash flows to service their pile of debt. Most companies
which have borrowed heavily in the past have a very poor interest coverage
ratio, which indicates their low ability to repay debt.
situation could change. “Balance sheet stress is a cyclical thing in stock
picking – it comes to the fore in a rising rate and slowing growth environment.
The market’s preference for quality will shift if rates soften further and
growth bottoms out,” the anlysts note
stress test analysis does not throw up any new name or sector. However, it does
reiterate the severe stress that not only corporate India faces but also the
banking system. At the sector level, it says: “Not surprisingly, real estate,
utilities, industrials and telecoms appear to carry maximum financial and cash
flow risks, based on our metrics.” All these sectors have been at the centre of
either scams or policy logjam.