17 big companies fail Morgan Stanley’s 'financial stress test'
17 large firms including Bharti Airtel, Jaiprakash Associates have an increased probability of “financial stress”.
MUMBAI: Seventeen large companies including Adani Power, Bharti Airtel and Jaiprakash Associates have an increased probability of "financial stress", while 20 other companies are borderline cases, according to a study by investment bank Morgan Stanley. On the other hand, companies like Colgate-Palmolive, Hindustan Unilever and Jubilant Foodworks have comfortable balance-sheet positions, the study said.
Morgan Stanley conducted the analysis on 104 companies under its coverage, using a method called the 'Altman Z-score.' The Z-score aggregates five different financial ratios of a company to estimate the risk of extreme financial stress. A Z-score above 3 indicates healthy a balance sheet and a lower chance of financial risk. The 17 companies with the risk have a score of 1.8 or less. Banks were excluded from the study.
Analysts at the investment bank said that in times of higher interest rates and low growth, balance sheet stress could become a factor in picking stocks. "The market's preference for quality will shift if rates soften further and growth bottoms out," the analysts led by MS India strategist Ridham Desai, said.
"Resentment of poor balancesheet quality is evident in that 3 out of 4 stocks with Altman Z-scores of less than 2.2, 12 months ago, have fallen in absolute terms and the basket as a whole is down 15 per cent," they said.
The analysts also measured cash flows to judge the capability of companies to finance loans out of operating cash flows. Among the companies studied, 20 firms were found to have a high cash-flow stress. The top stressed companies include Lanco Infratech, Balrampur Chini Mills, Adani Power and IVRCL; other companies in the top 20 included big names like Godrej Properties, L&T, Tata Power and JSW Steel.
Further, the report said that many stocks are pricing in these risks. Around one-third of the stocks under coverage have a higher-than-average historical value at risk (VaR), while for one-fifth of the companies VaR is within 30 per cent of the peak.
However, the analysts said that at an aggregate level, the balancesheet stress is in a comfortable zone and has been unchanged over the last financial year. The aggregate Zscore of the 104 companies studied is 3.21 and "largely unchanged" from 2011-12, the report said. The Sensex, too, is not pricing in these risks, the analysts said.
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Analysts at the investment bank said that in times of higher interest rates and low growth, balance sheet stress could become a factor in picking stocks. "The market's preference for quality will shift if rates soften further and growth bottoms out," the analysts led by MS India strategist Ridham Desai, said.
"Resentment of poor balancesheet quality is evident in that 3 out of 4 stocks with Altman Z-scores of less than 2.2, 12 months ago, have fallen in absolute terms and the basket as a whole is down 15 per cent," they said.
The analysts also measured cash flows to judge the capability of companies to finance loans out of operating cash flows. Among the companies studied, 20 firms were found to have a high cash-flow stress. The top stressed companies include Lanco Infratech, Balrampur Chini Mills, Adani Power and IVRCL; other companies in the top 20 included big names like Godrej Properties, L&T, Tata Power and JSW Steel.
Further, the report said that many stocks are pricing in these risks. Around one-third of the stocks under coverage have a higher-than-average historical value at risk (VaR), while for one-fifth of the companies VaR is within 30 per cent of the peak.
However, the analysts said that at an aggregate level, the balancesheet stress is in a comfortable zone and has been unchanged over the last financial year. The aggregate Zscore of the 104 companies studied is 3.21 and "largely unchanged" from 2011-12, the report said. The Sensex, too, is not pricing in these risks, the analysts said.
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