July 3, 2020

Strong balance sheet only key to survival for companies amid coronavirus crisis: SBI Ecowrap

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“It seems the current crisis is unprecedented and it is important to look at corporates within sectors that have adequate balance sheet strength,” SBI Ecowrap report said

Even though almost all sectors have taken a financial hit amid the coronavirus crisis, it’s not appropriate to evaluate a company through profit and loss parameters, according to a SBI report. Only those firms with robust balance sheets will be able to navigate through the crucial times, SBI Ecowrap report said. According to the initial trends, the majority of the sectors recorded negative growth in Q4FY20. Same trend may continue even in fiscal year 2020-21, the report noted.

Sectors such as automobile, FMCG, consumer durable may have posted weak growth in all key parameters in Q4FY20, they have required balance sheet strength to tide over the ongoing crisis, it added. For instance, the consumer durable sector has a healthy cash and bank balance to debt ratio, implying it could easily liquidate the debt if needed.

However, sectors such as sugar, steel, telecom, construction, among others don’t have required balance sheet strength and could face difficulties amid the ongoing uncertain times, SBI Ecowrap report also said.

The coronavirus pandemic has also resulted in unprecedented rating downgrades across sectors. In capital goods and engineering, there have been 870 downgrades as against only 50 upgrades in Q1FY21. “It seems the current crisis is unprecedented and it is important to look at corporates within sectors that have adequate balance sheet strength,” the report said.

Meanwhile, the last SBI Ecowrap report pointed out that maximum business disruption happened on April 12 and “it moved up thereafter”. “The first two weeks of June show a steep increase in index… however it declined again somewhat in the 3rd week.” “Bank deposits increased during the first two lockdowns but declined in the 3rd. After increasing in 4th lockdown they have declined again in the Unlock phase (June 20).” In addition, the percentage of leading indicators showing acceleration dipped in March 2020 and are recovering since.

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