Covid-19 lockdown: India Inc more vulnerable now than in recession of 2008

Profitability and cash reserves have halved since the global financial crisis

Corporate India now has a much lower financial capacity to absorb large losses, which are arising out of the Covid-19 lockdown, than in 2008, when the global financial crisis struck. India’s top listed companies now have higher debt, while profitability, accumulated earnings, and cash reserves are much lower than what they were on the eve of the Lehman crisis. To put it simply, India Inc’s liabilities have grown at a faster pace than earnings and revenues in recent years, eroding their ability to absorb a demand shock from the Covid-19 lockdown.

In contrast, the 2008 crisis was preceded by years of strong double-digit growth in revenues and profits, and that gave a reasonable amount of accumulated earnings to tide over the post-crisis slump in demand and profit (see chart). For example, the combined gross debt-equity of companies excluding oil and finance was 0.65x at the end of March 2008 compared to 0.82x at the end of March 2019.

Adjusted for cash and equivalents, the net debt to equity ratio has doubled in 11 years from a comfortable 0.26x at the end of FY08 to 0.53x at the end of FY19. Net debt in September 2019 worsened to 0.61x, according to unaudited results. If software services and fast-moving consumer goods companies are removed, the net debt-equity ratio worsened to 0.73x at the end of FY19 from 0.29x in March 2008. More importantly, companies now have much lower levels of cash reserves and accumulated profits to take care of contingencies than in 2008. Cash and equivalents accounted for nearly 40 per cent of companies’ net worth in FY08 and they reduced to 29 per cent in FY19…Read More