High fixed costs to weigh more on infra, IT, realty & hospitality

ET Intelligence Group: Fixed costs are expected to bite into the profitability of India Inc as a fallout of the 21-day nationwide lockdown, shows an analysis of financials of the BSE 500 companies. The sectors most affected include construction, real estate, hospitality and agro-chemicals. Companies will have to bear the burden of fixed costs, including interest payments, salaries and other fixed overheads in the absence of revenue recognition until the lockdown period is over. This is also expected to increase the need for short-term borrowings to fund working capital.A sample of BSE 500 companies, excluding banking and financial firms, reported fixed costs of Rs 50,000 crore compared with the net profit of Rs 4.5 lakh crore in FY19.Employee costs account for nearly two-thirds of the fixed costs. The Union government has issued advisory to companies not to cut salaries during the lockdown. This would have a higher impact on sectors with greater dependence on employees for revenue generation. These include information technology (IT), which spends upwards of 40% of revenue on salaries, and sectors such as hospitality, capital goods and auto ancillaries, where salaries account for 8-14% of the topline.In the case of IT firms, another adverse factor is the expected delay in payments from the overseas clients given that the sector earns over two-thirds of its revenue from exports. However, a weaker rupee, which improves export realisations, may offer some cushion. The rupee has depreciated by over 5% against the dollar since the beginning of the current year.Interest payments, which is the other major component of fixed costs, will hit debt-heavy sectors such as construction, real estate, capital goods, and agro-chemicals. A few companies including PVR and Reliance Retail have invoked force majeure clause to reduce liabilities towards rentals and payment to suppliers during the period of lockdown. 74941331The rising burden of fixed costs would affect cash flows, thereby increasing the need for shortterm borrowings to meet working capital requirements. The sample’s total debt was Rs 25.5 lakh crore in FY19. Of this, a quarter was in the form of short-term borrowings.A tighter working capital scenario would have a significant impact on sectors such as capital goods, construction, entertainment, consumer durables given their lower ability to convert operating profit before depreciation and amortisation (Ebitda) into operating cash flow (OCF). The Ebitda-OCF ratio for these sectors is between 0.04 and 0.25, which is quite low.In addition, the funding challenges for BSE500 companies would worsen if the payments from debtors are delayed beyond the third week of April. “The debt level of the auto ancillary sector may double in the near term,” said a CFO of an auto ancillary company. “The good news so far is that working capital of companies did not stretch before the lockdown due to muted demand. This may help bankers to extend higher working capital limits,” he added.Gautam Duggad, head of research, institutional equities, at Motilal Oswal, said, “Besides low fixed costs, it is also important to look at companies which have high cash on their books since these companies will be highly resilient in the present crisis.”Before the lockdown, banks charged interest on working capital at the end of every month and companies had to pay in the same month.Now to reduce the stress during the lockdown, banks have deferred interest payments for three months. But, they will still charge simple interest on the payment due in June. Banks are also sanctioning emergency working capital limit up to 10% of the sanctioned limit before the lockdown but only to companies which have AA credit rating and never were under SMA-1(special mention account) or SMA-2 categories.According to a fund manager, companies in FMCG and consumer staples are placed well in terms of lower fixed costs.

from Economic Times https://ift.tt/2R3kvx8