MUMBAI: Deleveraging by the private corporate sector which had gathered pace in the last few years stalled in the second half of 2019-20 as incremental borrowings were used to create financial assets like loans and advances to subsidiary/ other companies and not for capital expenditure, Reserve Bank of India (RBI) data shows.
The central bank analysed a sample of 3,760 listed non-financial firms (68 PSU and 3692 Non-PSU) during 2015 to 2019 and found that non-PSU companies had deleveraged substantively compared to public sector undertakings (PSUs).
Debt to operating profit ratio of PSU companies rose to a five year high of 2.38% in March 2019 compared to 2.32% for non PSU companies which was the lowest in the period after touching a peak of 2.71% in March 2016, data from RBI’s bi annual financial stability report showed.
However, slower sales growth and operating profit meant that the business environment was challenging even in the months before Covid-19.
Nominal sales of 1,640 listed private non-financial companies declined by 3.4% year on year and 10.2% in the fourth quarter while net profit declined by 19.3% year on year and 65.4% in the fourth quarter of 2019-20 despite the corporate tax rate reduction of September 2019, which brought down the effective tax rate by nearly 3%.
Both public sector as well as private sector companies showed a deteriorating liquidity position as measured by assets to liabilities with private companies liquidity position worsening to 1.51% in March 2019 from 1.48% in March 2018 while PSU companies worsening to 1.35% from 1.25% in March 2018.
Interestingly, deleveraging among non AAA category was more pronounced than their AAA rated counterparts. The debt to operating profit ratio for AAA companies increased to 0.76% in March 2019 from 0.66% in March 2018 while it came down to 2.96% for non AAA companies from 3.73% in March 2018.
Liquidity position of AAA companies has also tightened to 1.18% in March 2019 from 1.05% in March 2018 while it has lessened slightly for non AAA companies to 1.68% from 1.70% in March 2018.