The coronavirus outbreak and its impact on financial performance of companies will affect fund raising and loan repayment capabilities over two quarters. It will lead to cash flow crunch and credit rating downgrades of a large section of companies in the country.
FICCI’s survey says that almost three-fourth of the businesses indicate big reductions in orders. “Of these, almost 50 per cent indicate a 20 per cent and more decrease in orders,” it said. About 35 per cent of respondents indicate an increase in inventory levels. The pandemic has significantly impacted the cash flow with almost 80 per cent reporting a decrease in cash flow. A fall of 20 per cent cash flow was reported by more than 40 per cent respondents in the FICCI survey.
The unexpected cash flow reduction will topple repayment plans of companies that are coming at the end of March, the concluding month of the fiscal. Companies which want to raise capital for this financial year’s transaction settlements are also stuck because of the conservative lending mindset of banks, said an executive from an automobile firm.
Deepak Jasani, Head Retail Research, HDFC Securities said stake sale plans could also get postponed till stability returns in the risk-on sentiments, which could take between 2-4 months. “The turmoil on global growth situation due to the coronavirus scare has shrunk the risk appetite of most businesses and there is a fear on freeze in rotation of money in the system and possibility of rating downgrades,” he said.
The uncertainty in the future course and repercussion of Covid-19 have made financial markets volatile, leading to huge crashes and wealth erosion, which in turn is impacting consumption levels. Demand is crashing, except for essential commodities, across the country as the consumers moved into social isolation.
Rating agency Crisil said, if the pandemic is not contained by April-June 2020 globally, it will make the global slowdown severe. “It spreads rapidly in India, affecting domestic consumption, investment, and production. These would further hurt confidence and financial markets,” the agency said. It has cut its base-case gross domestic product (GDP) growth forecast for FY2021 to 5.2 per cent from 5.7 per cent.
The optimism has been tempered off late with some corporates calling off fund raising plans due to current market conditions, said Deepak Jasani of HDFC Securities. IndusInd bank deferred the fund raising meeting for Tier 1 and/or Tier 2 bonds considering the current market conditions. Bank of India and Central Bank of India have also shelved plans for raising funds for capital adequacy. The corporates have also put growth plans on hold. As a result, the banks anticipate lending to remain lukewarm, reducing the need to raise capital immediately.
India-focused private equity and venture capital funds have recorded capital raising with $11.7 billion in 2019, an increase of around 45 per cent. The External Commercial Borrowings (ECB) of Indian companies has surged 200 per cent to $7.8 billion in January this year. The present scenario indicates that the strategic investments which are in discussion stage will also be affected because of the crash of the valuations in the stock market.
“There is need to ensure flow of funds to industry through primary markets. Hence certain rules need to be tweaked to make this easier. Some measures are required to stem volatility in the market,” said FICCI in its report. It asked the government to relax the pricing formula for QIPs and preferential issues to facilitate raising of emergency equity capital by companies, especially financial services companies. It demanded for alternate day trading or reduced hours of trading in the stock market as the stock market crashed heavily on negative sentiments. It wants to ban short selling in markets.
FICCI wants the government to bring down the cost of funds through reduction in policy rates at least by 100 basis points. “The corporate bond and commercial paper market are suffering illiquidity. RBI may take some steps to intervene, either directly or through the commercial banking system, to ensure that adequate funds flow into this market,” it said. It added that the Insolvency and Bankruptcy Code (IBC) to be suspended for a short period for aviation and hotel sector as they are under severe duress. “Since a large number of people will stand to lose their jobs especially in the retail, hospitality, travel, construction sector, the government can consider giving incentives for employers,” it said.