Brief: Performance of Non-Government Non-Financial Private Companies in the previous two financial years remained uneventful; Even though operating expenses declined due to lower raw material prices, a decline in sales led to a decline in overall profitability-nullifying gains; Stress levels in smaller enterprises worsened while larger companies reined in their leverage by reducing Capex.

Impact: Neutral

As per RBI data released on industry wise performance of ‘Non-Government Non-Financial Companies’ for FY16, topline growth has dropped to 6.6%; previous year, the growth was recorded at over 13%. Sales growth of companies with turnover of Rs. 1 billon and over has dropped from nearly 20% in FY15 to 9% in FY16. On the other hand, performance of the small companies (turn over less than Rs. 0.25 billion) has been in the negative territory for the past two consecutive years. However, due to fall in raw material cost, the operating profit margin across all size classes remains positive.

Another major inference is the Inventory level as virtually all industries have recorded a drop year on year. Inventories stand at 8.5% in FY16 as compared to 14.2%, the previous year. Inventory level of electrical equipment, in contrast, has increased from 1.6% to 15% though. We believe that this can be due to previous excess production in anticipation of demand. Due to higher competition from Chinese items, domestic supplies eventually outstripped demand and hence resulted in inventories. The industry has cut production and this is understood from the negative growth of (-) 4.5% in IIP index. The construction sector too remained stressed with worsening debt protection metrics, especially in the Real Estate segment.

Debt to equity ratio (D/E) of large and medium companies has declined due healthy margins, which in turn result in deleveraging. Leverage has however increased marginally at an aggregate level owing to poor performance of the small companies, which remain at risk due to non-access to financial services and facing a higher hurdle rate. We believe that D/E may record a fall also due to lower capex cycles and de-growth in credit demand.

Interest coverage ratio (ICR) on the hand, for all sectors has remained steady as the commercial banks did not pass the rate cut benefits to the end consumers in FY16 and therefore no impact was seen. We however expect the ICR to have improved in Q3, FY17 onwards when banks began lowering lending rates by around 100 to 150 bps.

Growth rate of selected parameters for Non-government non-financial private companies:

Source: RBI Bulletin June, 2017

Note: # indicates data not available for the year

D/E and ICR ratio for Non-government non-financial private companies: