'Few top corporates unlikely to get higher return on capital'

MUMBAI: Despite high economic growth, a few top corporates in the country are unlikely to get higher return on their capital employed due to high non-productive assets build up in the past few years, says a report.
"Nearly 111 of the top 500 corporate borrowers, which held Rs 7.4 trillion of the overall debt of Rs 30.2 trillion at the end of financial year 2015-16, are unlikely to generate higher return on capital employed (ROCE) than weighted average cost of capital (WACC), even in a high economic growth scenario," India Ratings and Research said in a report here today.

The agency analysed the balance sheets of borrowers for financial year FY11-FY16 and attributed the low ROCE to an incremental build-up of relatively high non-productive assets during the period under review.

Such corporates witnessed a decline in the proportion of their fixed assets to total assets to 52 per cent in the financial year 2015-16 from 71 per cent in fiscal 2010-11.

"As a result, the credit metrics of these corporates are likely to marginally improve in the near term," the report said.

The agency observed that Rs 4 trillion of the Rs 12.4 trillion debt, at the end of 2015-16, held by 240 corporate entities with a relatively high proportion of non-productive assets and weak cash flows.

Debt servicing could remain a challenge for such corporates. Hence, these entities must engage in deep debt restructuring and reduce their debt significantly for long-term sustainability, it said.

"Banks exposed to such entities may find it difficult to fit these corporates into the scheme for Sustainable Structuring of Stressed Assets (S4A)," the report said.

The agency believes that corporates with a relatively high proportion of productive assets but with mismatched cash flow have a better chance of servicing their debts and could fall under the ambit of S4A scheme.

Although haircuts may still be inevitable in many of them, quantum could be significantly lower. Such entities are likely to generate higher ROCE than WACC as the economy recovers, it said.

The agency expects lower shareholder returns to be generated by 26 non-vulnerable corporates with low volatility in cash flows but a relatively high proportion of non-productive assets. These entities accounted for Rs 3.4 trillion of the Rs 17.8 trillion debt held by non-vulnerable corporates.

Corporates with strong profitability levels, healthy capital structures and a relatively higher productive asset base hold Rs 14.3 trillion debt of the overall non-vulnerable debt, the report said, adding these entities are likely to significantly benefit from an economic recovery.