Altman Z score and RBI Kamath committee ratios.

 Edward Altman published the Z score formula for predicting bankruptcy way back in 1968. He said this formula can be judiciously used to find whether any company may go into bankruptcy within the next two years. It is a quick find formula to gauge the financial health for publicly held companies by using the P&L values and Balance sheet values through a mix of business ratios.

In simple terms Z =1.2X1+1.4X2+3.3X3+0.6X4+1.0X5, where

X1= Working capital/Total assets.i.e the ratio of liquid assets in relation to the total assets or size of the Co.

X2=Retained earnings/Total assets i.e the ratio of retained profit in relation to the total assets of the Co.

X3=EBIT/Total Assets i.e the ratio of efficiency of the operations without the impact of leveraging, in relation to the assets deployed in the Co.also signifying the importance of operating earnings for the long term financial health of the Co.

X4=market capitalisation/book value of total liabilities i.e the ratio of market price in relation to the total liabilities incl. borrowings are  considered as a reflection financial health;

X5= Total sales/ Total assets i.e the ratio of assets turnover indicating how well the assets are utilised to generate the sales.

There are some variations for privately held companies and for service cos.

What is the necessity for delving into this formula of bankruptcy now? RBI appointed KV Kamath Committee has come out with similar ratios for the use of banks in identifying distress among the Indian business companies with various ratio values depending on the kind of business the cos concerned are in.

The Committee came out with the following ratios, that were selected based on their relevance for Resolution Plan for the distressed cos. when their loans are put to restructuring by the banks. 

1)Total outside liabilities(TOL)/Adjusted Tangible Networth(ATNW)i.e Adjusted Net of investments;

2)Total Debt/EBIDTA ;

3)Current Ratio;

4)Debt Service Coverage Ratio (DSCR);i.e the ratio of the addition of the net cash accruals with interest and finance charges divided by the addition of the current portion of the long-term debt with interest and finance charges.

5) Average Debt Service Coverage Ratio (ADSCR) i.e average over the loan period.

All these ratios are highly relevant with a well-defined threshold for various industries of the domestic economy including that of services, for those looking at the financial health of the Companies. Many Credit Rating Agencies also use many of these ratios. Perhaps, the Altman Z score may also be included for evaluating the preponderance to bankruptcy among the Co.s  under the distressed category seeking their bank loans to be restructured.

Lockdowns ,Unlocks and White elephants!

 

We have had four lockdowns and unlocks across the country.To start with it was Complete lockdown, which struck like a bolt from the blue starting from March 24th till May 31st 2020. Many prominent opposition leaders severely criticized the Govt for this lockdown accusing Modi of dictatorship tendency throwing the hungry, poverty-stricken, migrants on the streets and pavements uncared for. The second lockdown little relaxed was in June as experimentation and once the pandemic started spreading wildly, Govt. was again back to stricter lockdowns. But by the end of june, Central Govt realized that the question of livelihood was becoming important and advised staggered unlocks.

But many states ruled by opposition leaders taking a holier than Centre attitude continued with strict lockdowns introducing epasses even for intrastate movements, imposing restrictions like total lockdowns during weekends making life difficult for the common man. There was a tough competition between states as to who leads in making life miserable for the man on the street.

Now the whole world is praising Modi for his foresight in clamping down a total lockdown inorder to control the spread of the pandemic. Opposition leaders have grudgingly acknowledging this, have now started saying that because of lockdown Indian economy is in ruins.

India had to face many unwanted human tragedies in between due to industrial accidents in Vizag, Neyveli,etc.fire accidents, air accident in Kochi, and also serious border clashes with China apart from terrorist incursions in J&K from Pak.

In the meantime, Central Govt unveiled Atmanirbhar initiatives, Agri reforms, and announced Rs.21 lac crore package of measures to revive the economy.

In the melee that followed, India is still left with some white elephants like Air India which are a drain on the exchequer.Air India should have been corporatized, separating the ownership and the management at least five years back. Had Central Govt taken this bold step at that time we would have found real value of the Air India as a Corporate entity. We understand that when Jitendra Bhargava wrote a book "Descent of Air India", it kicked off a political storm with Praful Patel filing a defamation case in  the court to get a ban on the book. But the author self-released it  in 2016 and is available on Amazon kindle as an e-book.Praful Patel withdrew his defamation suit in 2017.

Now with Air India only its Intangible asset of Bilateral Landing Rights is the most valuable of all assets.This has been brought out by Kumar V.Pratap former Joint Secy,GOI, in his recent article in FE wherein he has said that Planning Commission in 2011,refused permission to publish his earlier article on Privatisation of Air India(see the link) .Now the quotes for the sale of Air India have been invited through a global tendering process. The last date for submission of bids have also been so far postponed 4 times and now the last date stands at 31st Oct.When Travel & tourism and more particularly the aviation sector around the world has been severely crippled by the pandemic , finding a suitable bidder would be highly improbable. But Govt is left with Hobson's choice now.It has to bide its time for a suitor when the airline continues to lose its value and burn tax payers' money.

BPCL sale tendering process also is in the limbo due to the prevailing uncertainty induced by the pandemic. Other PSU divestments are also moving at snail's pace due to lockdowns.

To sum up, the Govt is unable to unlock the value for its assets!!

Government's asset monetisation

Policy prescriptions are flying thick and fast and on my part, I am adding one more .

All Economists including me are prescribing deficit monetisation, pump priming etc. taking a leaf out of Modern Monetary Theory.

As against this,Central Govt. has an alternative which is called Asset monetisation, according to me.Govt calls it Disinvestment/Divestment of PSUs. When the whole world is reeling under Covid pandemic , will there be a suitor for Air India?

Even if there is a good buyer will he be willing to pay the right price for Air India.What will be the benchmark for its valuation when the whole industry is bogged down by this pandemic and its repercussions on the travel industry.

In such unprecedented situations , it is best advised not to go in for outright sale transactions of Government stake in PSUs including Air India, BPCL,etc.

Similarly, other intangible but real assets are Spectrum waves (link), Mining/Abiotic  ,Biotic Resources which are hidden inside the Earth, Ocean ,Space etc., Potential Renewable energy sources, which have future economic value and can add to GDP when suitably exploited without degrading the environment.

If these resources are valued properly, and India identifies these assets in terms of monetising its strengths, then India will have to look for its Enterprise value and raise suitable resources upfront for its current requirements in investing in its infra development.

In fact even lands owned by Indian Airports Authority can be used better by allowing usage of its land underground for commercial purposes.Even some of the defence lands can be wisely used under the ground for commecial purposes without in any way jeopardising defence security.