Mid-size and emerging businesses with a revenue of less than Rs 750 crore may witness a 6 per cent dip in their turnover and up to 1.25 per cent contraction in profit margins in FY21, a domestic rating agency said on Tuesday.
India Ratings and Research (Ind-Ra) said because of the troubles expected for what it calls as the mid and emerging corporate (MEC) segment, it is maintaining the "negative" outlook on this.
The rating agency said the estimates are because it has cut in the GDP growth estimate to 1.9 per cent. The ongoing COVID-19 pandemic and the lockdowns have resulted in a chilling of economic activity, resulting in severe impacts to businesses.
"Commensurate with the agency's revision of FY21 real GDP growth twice to 1.9 per cent since January 2020, the aggregate turnover of MECs is expected to contract by 6 per cent while operating margins are likely to be lower by 75-125 bps than Ind-Ra's pre-COVID base case estimates," it said.
Consequently, cash flow from operations could contract by 3-12 per cent in FY21 from FY20 levels, the agency said.
In the MEC segment, the downgrade to upgrade ratio more than doubled to 2.85 times in FY20 and it added that the same will continue in FY21 as well at a heightened pace.
"Lower-than-expected operating cash flow generation will weigh on the ability of rated issuers to deliver their balance sheets in FY21, and in certain cases the quantum of outstanding debt could even be increased to fund cash flow mismatches," the agency, which rates over 800 companies in the segment, said.
Ind-Ra made it clear that the likelihood of positive rating actions "remains low" and added that it will take some time before the trend of impairment in the credit quality reverses.
Comparing the segment with the large corporates, it said although the broad contours of the recovery will be the same for MECs, the troughs are likely to be more pronounced as their ability to withstand such disruptions is low, access to funding has been severely constrained and a larger portion of their revenues are attributable to exports than that of large corporates.
An unprecedented fall in industrial activity will translate into significant deterioration in the liquidity profiles of rated MEC issuers, including those in the investment grade,the agency said, adding that an analysis indicates that nearly 25 per cent of the investment grade rated issuers may report a cash flow shortfall for debt servicing in FY21.
Securing fresh funding could be challenging for the MECs, especially in the aftermath of the liquidity crises faced by various non-banking financial companies (NBFCs) in FY19 coupled with tepid growth in non-priority sector advances by the banking sector to the MECs.
"Risk aversion becomes particularly pronounced in scenarios wherein lenders face challenges in both assessing the degree of risks and pricing them effectively. FY20 saw a significant rise in rating downgrades for rated MECs. In such a scenario, even if credit is made available, the underwriting standards are expected to be stringent while credit spreads are likely to widen further in FY21," it explained.