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Financial stress spreads in India Inc despite improvement in profitability

Krishna Kant The Business Standard
Published on June 20, 2017

Mumbai, June 19: The list of financially stressed corporate entities grew longer in 2016-17 despite a general improvement in corporate profitability. Nearly 11 per cent of the country’s largest listed companies, excluding banks and financial companies, could not service interest payments on their loans in 2016-17, up from nine per cent in 2015-16. These companies accounted for around a fifth of all gross corporate debt at the end of 2016-17.

In all, 85 companies had inadequate profits — operating profits lower than interest obligations — in 2016-17, up from 67 companies in 2015-16. These companies reported a combined operating profit of Rs 12,000 crore in 2016-17, lower than their cumulative interest obligation of Rs 60,000 crore.

The corresponding figures for the 67 companies in 2015-16 were Rs 5,100 crore of combined operating profit and Rs 43,200 crore in combined interest obligation.

The number of companies with inadequate profits was stable between 2012-13 and 2015-16 (see chart). When a company’s operating profit is lower than its interest obligation it is unable to service its debt, making its loans potential non-performing assets (NPAs) for banks.

Among the companies to join the list in 2016-17 were Alok Industries, Videocon Industries, Hindustan Construction, Castex Technologies, Uttam Galva, Usha Martin, Ruchi Soya and Amtek Auto.

Together, these 85 companies had gross outstanding loans of Rs 5.04 lakh crore at the end of 2016-17, up from Rs 4.6 lakh crore at the end of 2015-16. The number is expected to rise as more companies in the sample file their audited balance sheets for 2016-17. The current data are based on interim annual results in which many companies do not report consolidated numbers.

In 2015-16, the financially troubled companies reported 26 per cent higher debt compared to what they had reported during their quarterly filings. The analysis is based on a sample of 761 companies from the BSE 500, BSE Midcap and BSE Smallcap indices, excluding banks and financial companies and oil refining and marketing companies. The sample also excludes Vedanta and Tata Steel, which reported large non-cash losses in the recent past. It includes only those companies whose annual financial numbers are available since 2006-07.

“Overall stress remained unchanged in the fourth quarter of 2016-17, with debt having interest cover of less than one still at 40 per cent. The weak continue to get weaker, as companies with interest cover less than one saw a 35 per cent year-on-year decline in their operating profit. The share of debt with loss-making companies rose to 36 per cent from 32 per cent," wrote Ashish Gupta and Kush Shah of Credit Suisse.

An interest cover of one means that a company is earning operating profit only enough to pay its interest obligation.

Others attribute the deterioration to demonetisation and a continued slowdown in industrial and investment activity. “A sudden drop in demand after the note ban hit the finances of many companies. We now see a cyclical recovery in the economy driven by government spending but this may not be of much help to indebted companies in capital intensive sectors," said Dhananjay Sinha, head of equity and strategy at Emkay Global Financial Services. According to him, the economic recovery will be largely felt in the consumer demand-driven sectors while the bulk of corporate debt is lying in the books of capital-intensive sectors such as power, metals, infrastructure and real estate.

These stressed companies reported a combined net loss of Rs 60,300 crore and net sales of around Rs 2.83 lakh crore. Together these companies accounted for 18.3 per cent of the total gross outstanding loans in 2016-17 but only 6.2 per cent and 1.4 per cent, respectively, of the entire sample’s net sales and operating profit. The data suggest a steady rise in the proportion of corporate debt under stress. In 2011-12, 49 companies, accounting for 4.1 per cent of all corporate loans, had difficulty servicing their debts. The ratio has been rising steadily ever since.

A similar trend is visible in the quarterly results, where the universe is bigger. Interest payments exceeded operating profits for 744 companies during the March quarter, up from 665 companies during the previous quarter. There was an improvement over the March 2016 quarter, when 773 companies had reported inadequate profits.

However, despite a decline in their number, financially stressed companies reported greater losses in the fourth quarter of 2016-17 (Rs 37,603 crore) than in the fourth quarter of 2015-16 (Rs 29,834 crore).

The analysis is based on the quarterly results of a sample of 3,028 companies whose numbers are available for the last 20 quarters.
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All you wanted to know about... GST: Reverse Charge Mechanism

Lokeshwarri S K The Business Line
Published on June 20, 2017

Imagine a class with half the students very boisterous and naughty with little respect for school rules. The other half of the class that follows all the instructions diligently also gets punished for creating a racket, when the principal makes his customary rounds around the school. To avoid the punishment, the goody-goody bunch must make sure that the mischievous ones behave properly.

The situation is similar under the soon-to-be implemented Goods and Services Tax (GST) regime. Every business has to ensure that its suppliers, of both goods and services, are paying the right amount of taxes on time. This is accomplished through the reverse charge mechanism.

What is it?

The GST has to be typically paid by the supplier of goods and services. But in some cases, the liability to pay the tax falls on the buyer. This reverse charge is, however, applicable only under certain circumstances. The most common instance is when a business buys goods or services from a supplier who is not registered to pay GST.

Let’s assume that business A that is GST-compliant buys goods worth Rs. 100 from business B that is not registered to pay GST. If the GST on the goods supplied is Rs. 5, then business A, instead of business B, will have to pay Rs. 5 to the Government. Business A can, however, claim input tax credit of the GST payment of Rs. 5, when it sells the goods to its client.

Besides purchases from an unregistered supplier, the reverse charge kicks in other circumstances as well. An importer is liable to pay the GST under the reverse charge mechanism. Also government departments making payments to vendors above a specified limit (Rs. 2.5 lakh under one contract) are required to deduct tax (TDS) and e-commerce operators are required to collect tax (TCS) on the net value goods or services supplied through them.

Why is it important?

The best part about GST is its self-policing mechanism. The Centre is trying to check tax evasion and expand the tax net through couple of clauses in this tax regime. First, seamless flow of input tax credit is possible only when all the suppliers of a business pay GST. So each business will make sure that its suppliers have paid the GST so that they can take input tax credit.

Reverse charge is an additional check. By putting the burden of paying the tax on the buyer, in cases where the supplier does not pay GST, the Government is gently coercing all businesses to sign up for GST.

The major hindrance for the tax department in going after tax evaders is shortage of man-power. With all resources being allocated to chase large tax evaders, its difficult to check the small evaders. This self-policing mechanism is, therefore, expected to do the trick for the government, helping it grow the tax base as well as tax collection.

Why should I care?

If you run a business, you need to hurry and ensure that all the entities who supply you goods and services are registered for GST. If they aren’t, you will have to pay the GST on their behalf. This will increase your paper-work and can cause cash-flow issues as well.

If you are toying with the idea of escaping the GST net by misstating your turnover, to show that it is below the threshold limit, or through some other means, think again. With the reverse charge falling on the buyer, your order book might shrink as companies would prefer to deal with only those entities who are registered for GST.

The bottomline

It’s time to reverse wrong strategies and get GST compliant
moving as dud in 1414 - 1419 range (but 1414-15 range most of the time) for last 2 hours :mad:
like yesterday
Hi, I wanted to apply for cdsl IPO.
I have two demat a/c , one zerodha and another old one cil securities.
Both have same linked bank account SBI .
Can I apply in both demat a/cs using same sbi bank?

Thank you
Last time I had applied for 2 lots for Shankara building IPO using only zerodha a/c dint get any allotment. So is it possible to apply using two demat a/c both belong to me only.
Thank you
Hi, I wanted to apply for cdsl IPO.
I have two demat a/c , one zerodha and another old one cil securities.
Both have same linked bank account SBI .
Can I apply in both demat a/cs using same sbi bank?

Thank you
two application with same PAN no ..... even thru different intermediary

your both applications will be cancelled ...
Do you know to backtest. I want to do a simple backtest. can you or anyone help me with amibroker backtesting?

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