BUSINESS

Restructuring remains critical for mid-corporates amid economic headwinds: Ind-Ra

Mumbai
India Ratings and Research (Ind-Ra) has maintained a negative outlook on its mid and emerging corporates (MEC) portfolio for 2H FY21 due to persisting liquidity and macro-economic headwinds caused by Covid-19 led business disruptions. The agency expects aggregate revenue to decline 15.9 per cent year-on-year in FY21 as against 6.02 per cent envisaged in May. Furthermore, amid a significant delay in economic recovery, the ability of issuers to withstand the shock of lower capacity utilisation along with stressed liquidity will be a key monitorable.
Ind-Ra said it witnessed a decline in the upgrades to downgrades ratio among MECs in 1H20, which it believes will persist in 2H due to continued liquidity headwinds. However, the ratio will improve in FY22 subject to effective and timely implementation of the loan restructuring scheme. Ind-Ra expects MECs across the sectors to witness a full recovery to their pre-Covid levels in their revenues and capacity utilisations after 2H FY22.
Recovery in margins will be stoked by a government stimulus to ramp-up demand, ability of issuers to pass on fluctuations in input costs to their suppliers and a recovery of supply-side issues. Ind-Ra has revised its estimates for EBITDA margins to 8.93 per cent in FY21 from pre-Covid base case estimate of 9.37 per cent.
Consequently, the issuers will need to traverse the liquidity shock faced in FY21, normalise their working capital levels and seek credit to witness a turnaround. Around 50 per cent of Ind-Ra rated MECs are based in states which have a high number of Covid-19 cases. Thus lockdown extensions can impact their ability to seamlessly resume operations. The recovery will also depend on the location of issuers and inter-state dynamics like lockdown extensions and fiscal condition.
Any lower-than-expected recovery in 2H FY21 could defer assumptions regarding the recovery path, said Ind-Ra.

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