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Monday, February 6, 2012

Which sectors are more prone to default? Some CRISIL default study insights

While browsing the CRISIL website for some rating rationales, I stumbled upon their default studies, which had some interesting data. In the 1997-98 Asian crisis, the defaults had risen(unsurprisingly not in the dot.com bubble burst since India had not many tech startups then) as they are rising now post the subprime crisis. While the explosion of the ratings base(over 3000 ratings in 2010 versus just 900 in 2009) may render the numbers non comparable, an important insight lies in the sectoral breakup.

Source:- http://www.crisil.com/pdf/ratings/crisil-rating-default-study-2010.pdf published in May11

Textiles and metals invariably ask for government help for their capex(TUFS scheme), raw materials(export ban/duties on ore), utilities costs(power, railway), marketing(by textile fair funding etc). And the reason is not far to understand when we see the breakup of those sectors in any major default. While the RBI clampdown on NBFCs prevented major failures(though the microfinance crisis in AP may yet lead to debt defaults and restructurings), textiles and metals do not seem to have changed their true colours during all this time. 

Hence, while investing in that next hot textile/metals stock, investors should remember that these stocks are more likely to default on their debt during crises, as the past historical record shows. This is even as compared to other cyclical industries like sugar, real estate etc which are perceived to be more risky but surprisingly do not figure in this. And while investors can still speculate on these stock's upside on getting good terms during CDR(aka GTL group/Kingfisher Airlines etc), it is a pure speculation in that case as opposed to an investment. Creative bank accounting like restructuring to avoid NPA classification may have led to that, but prime facie one should take note of these two sectors which seem value traps.

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