The COVID-19 pandemic and the nationwide lockdown is going to have a huge impact on corporate India, with earnings before interest, taxes, depreciation and amortization (EBITDA) likely to decline by at least 15-18 per cent in the current financial year ending March 31, 2021, credit ratings agency CRISIL said on Thursday.
In the year ended March 2020, EBITDA is seen down 3 per cent, compared with a 9 per cent growth in the year earlier, its analysis showed.
India imposed a nationwide lockdown on March 24, for 21 days, which has been extended to May 3. Sectors such as airlines, hotels and travel and tourism, which had been impacted much before the lockdown, are going to be hit much more, given that normalcy is unlikely to resume anytime soon.
Overall, CRISIL expects India Inc revenues to decline 8-10 per cent in the current financial in the base case. However, if India’s economic recovery takes a longer time, the revenues could fall by as much as 12 per cent to 15 per cent.
“With this kind of a huge drop in revenue, I think operating leverage is going to hurt companies very badly and despite lower commodity and energy prices, we expect margins to get crunched. So, in our base case scenario, we expect EBITDA to fall on a year-on-year basis by 15-18 per cent. The downside scenario, (if) the number gets ugly, (it is) close to 25-30 per cent,” Prasad Koparkar, senior director at CRISIL Research told reporters.
Liquidity will be a big challenge for companies and the working capital stress will be highest for the micro, small and medium enterprises.
“What is going to hurt them the most in the immediate term is obviously the demand, more importantly is the liquidity. In many other countries, the government is taking a call and providing some kind of support for loans to smaller entities. Unless that is done, the liquidity issue will snowball into a structural issue for them,” said Koparkar.
The smaller companies are going to face a lot of pain for 1-2 quarters and a lot of consolidation is expected in many sectors as many smaller players will not be able to sustain this downturn, he added.
These troubles in the corporate world, will have an adverse impact on non-performing assets of banks, which have only started falling over the last 12-18 months.
With no major bankruptcy resolutions expected this year, and fresh slippages likely to increase, CRISIL’s downside scenario sees the gross NPAs worsening by as much as 200 basis points to around 11.5 per cent from around 9.5 per cent expected this year.
CRISIL expects india’s GDP to grow just 1.8 per cent in the year ending March 2021, with risks tilted towards a scenario of zero GDP growth. A worsening economy will have an adverse impact on NPAs, said Koparkar.
What’s important is that the retail loan book could also result in a rise in bad loans. “This time the stress is across both corporate and retail books. The latter is also going to see a significant rise in NPAs. The actual income and therefore, the loan repayment capacity is going to decline in the retail segment and the growth slowing down will also impact the denominator. So, we certainly expect 11.0-11.5 per cent (GNPA) as a base case scenario with a material upside,” Koparkar added.
In this backdrop, CRISIL has called for a broader fiscal support from the government, which will help some of the sectors navigate the crisis.
The government thus far has announced a Rs 1.7 lakh crore welfare stimulus and a stimulus for the industry has been talked about, but is to materialise. According to CRISIL, a minimum fiscal support of Rs 3.5 lakh crore would be required to support vulnerable sections and businesses, apart from various other stimulus measures, like government’ guarantees on incremental loans.
“The small and medium enterprise sector is extremely vulnerable. You will have to support them so that they are able to survive the downturn. That should be the part two of the stimulus,” said Dharmakirti Joshi, chief economist at CRISIL.
He said not only will companies need financial support during the lockdown, but a fiscal stimulus would also be necessary in the recovery phase as demand is likely to remain weak.
