Corporate India is comfortably placed, going by Insolvency & Bankruptcy Code (IBC) admissions data, according to Kotak Securities.
A total of 332 cases were admitted to the insolvency process in Q1 (April-June) FY23 (358 in Q4/January-March FY22) with yearly run-rate still below the 2,000 cases admitted in FY2020.
“We infer from IBC admissions data that corporate India is comfortably placed,” said a KSL analysts team comprising M B Mahesh, Nischint Chawathe, Ashlesh Sonje, Abhijeet Sakhare and Varun Palacharla, in a report.
The analysts noted that the direction of cases is likely to undergo a change as systemic stress has largely dissipated.
“We have not seen a large capex cycle or asset price inflation in the recent past that could pose a threat in the near term to asset quality of banks,
“Rather, we expect a significant proportion of cases to be from borrowers in the mid and small enterprise segment, which was impacted by Covid,” said the analysts.
They opined that with large corporate India in the best shape, the outstanding claims are likely to come off sharply in the near future.
“Corporate India is likely to have a cautious approach towards taking debt and would prefer to have a strong focus on cash flows over growth,” per the report.
The analysts noted that the number of new cases admitted through IBC (at 332 in Q1 FY23) is well above 139 cases admitted in Q1 FY22, but still below the annual run-rate of about 2,000 cases admitted in FY2020.
They assessed that the total number of ongoing cases has been inching up gradually and stood at about 2,000 as of June 2022.
“IBC is gaining prominence as operational creditors lead new case admissions; about 50 per cent cases were initiated by operational creditors and about 40 per cent by financial creditors,” per the report.
Of the 3,600 cases that were closed until Q1 FY23, only about 14 per cent were resolved while about 47 per cent faced liquidation. About 61 per cent of ongoing Corporate Insolvency Resolution Process (CIRP) cases have crossed the 270 days timeline.
Haircut on resolved cases high
The total amount of debt resolved through the IBC stands at about ₹7.7 lakh crore, but resolutions have slowed in recent quarters, the report said.
Based on available data for all cases resolved, financial creditors have faced a haircut of about 70 per cent on admitted claims. The amount yielded on resolution as a percentage of liquidation value is high (about 180 per cent). The haircut for cases resolved in Q4 FY22 was high at about 90 per cent.
“The overall haircut scenario is not very encouraging. As we are working through some of the weaker assets where there are incomplete projects or sectors with very poor demand from buyers, the realization values have declined,” the analysts said.
Closure by liquidation remains dominant
Liquidation (accounting for about 47 per cent of all closed cases) remains the most common path of closure for cases under the insolvency resolution process.
As of Q1 FY23, about 61 per cent of ongoing cases have passed 270 days since admission, with another 10 per cent crossing 180 days. Hence, the number of cases facing liquidation is likely to stay high, per the report.