Stock Analysis, IPO, Mutual Funds, Bonds & More

More debt defaults on the cards: Beware, you maybe holding these stocks

Analysts have advised investors to steer clear of companies with a high levels of debt.

, ETMarkets.com|
Last Updated: Jul 03, 2019, 08.05 PM IST
Getty Images
Analysts expect more defaults in the coming months as a crippling liquidity crisis persists in the economy.
NEW DELHI: Dalal Street has acquired a new sobriquet in this season of repeated failures to meet corporate debt obligations – Default Street?

Last week itself had four such instances: DHFL defaulted on unsecured commercial papers worth Rs 225 crore, Cox & Kings failed to meet debt obligations on maturing commercial papers twice, Reliance Home Finance had to refinance an NCD after failing to repay money on maturity and Sadbhav Infra earned a ‘default’ grade for special purpose vehicle.

The stocks have taken a knock. Cox & Kings cracked 30 per cent and Sadbhav Infra tanked 4 per cent in the last one week. DHFL is flat. Reliance Home Finance meanwhile has jumped 11 per cent even as the scrip is down 40 per cent in the last one month.

Analysts expect more defaults in the coming months as a crippling liquidity crisis persists in the economy. They have advised investors to steer clear of companies with a high levels of debt, promoter share pledges and those with cash flow issues.

Sebi’s tough stance on standstill agreements between mutual funds and borrowers and enhancement of disclosure norms for promoter share pledges to safeguard investor interest could only make going difficult for weak companies, say analysts.

A trend is in the making, said Chakri Lokapriya, CIO & MD at TCG AMC, who expects a number of defaults in the coming months, which the market will eventually learn to deal with.

“The stock market does have a fair degree of sense of the highly-leverage companies. You will see a certain movement away from highly-levered companies, where there is no clear action plan in place,” Lokapriya said.

DHFL, Sintex Industries, Eros International, Mauria Udyog and Jagatjit Industries are among a few companies that have received ‘default’ ratings on their debt papers in June, data compiled from corporate data base AceEquity suggests.

Earlier, LEEL Electricals, Jaiprakash Associates, Shriram EPC, Mercator, Suzlon Energy, Hindustan Construction Company, Punj Lloyd, Mandhana Industries, Vivimed Labs, Sanghvi Forging & Engineering and DS Kulkarni Developers had been assigned similar default ratings on various papers by different rating agencies since April 1.

The RBI in its latest Financial Stability Report said there was an increase in the share of downgraded/ suspended companies during the second half of FY19. (See chart)


Analysts said unbearable debt and cash flow stresses have not propped up overnight. The situation was escalating for corporates for many years until the IL&FS default triggered the crisis of confidence.

Companies took a lot of time to assess the changing situation and easy money died by then. This, along with a slowing economy that dented sales, put pressure on cash flows and ability of firms to service debt, kicking off a vicious cycle of rating downgrades and defaults, which is unlikely to end overnight.

“Some of the companies downgraded recently did not adhere to the rulebook. They carried out a number of side-business activities, which hit their balance sheets badly. Post the IL&FS saga, the market resorted to credit rationing and started recalculating risks, including that of share pledges. In the process, many of these entities got exposed, which have either defaulted or are on the verge of defaulting,” Sunil Kumar Sinha, principal economist at India Ratings, told ETMarkets.com.

The IL&FS saga started in September 2018 when the group defaulted on a short-term loan of Rs 1,000 crore.

Data showed Care Ratings downgraded a total of 284 debt papers valued at Rs 2,86,581 crore in six months between October, 2018 and March, 2019 against 72 upgrades worth Rs 9,577 crore. Of them, 12 papers were downgraded to to ‘default’ grade.

Full-year data available for ICRA suggests credit quality pressures on India Inc. The rating agency downgraded debt papers worth nearly Rs 3.2 lakh crore in FY2019, up 10 per cent YoY.

Power, aviation and construction sectors were the key contributors to the total downgraded debt during the just-concluded year, Icra said in April.

In the case of Cox & Kings, the company has been grappling with cash flow mismatch for some time now. The situation was exacerbated by recent rating downgrades, the company said, adding that it was looking meet its financial obligations through a combination of internal accruals and monetisation of assets.

In the case of Sadbav, Care Ratings factored in overdues on the account of the SPV for debt servicing owing to poor liquidity and debt coverage, thanks to subdued toll collection on a sustained basis against large debt obligations.

“There are corporate governance and balance sheet issues and a crisis of confidence. Even though the problem unfolded after the ILFS default, it was building up in the system for several years. Over time, the system will get cleared up. But it is unlikely to resolve overnight,” Sinha said.

Also Read

MFIs reporting loan data daily to prevent default

The next debt crisis: Small borrowers’ big defaults

Reliance Capital defaults on debt repayment

Default fear pushes funds to ring-fence Vodafone Idea debt

Avoid bankruptcy trial for companies with minor defaults: FinMin

Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links

Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service