PF data acts as a leading indicator for identifying distressed companies: Heckyl study

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Companies from consumer services, industrials and financial sectors lead drop in PF score in FY20

Publicly available data from Employees’ Provident Fund Organization (EPFO) is one of the datasets that can be very useful to gain unique insights in the assessment of credit risk. In our view, a significant delay in monthly Provident Fund (PF) payment is a potential red-flag as the delay could be due to liquidity crunch faced by the company. Moreover, a substantial drop in the number of employees or amount paid for PF is also a potential red-flag as it signals layoffs or job cuts to reduce the company’s operational cost.

Heckyl’s Risk Analytics System (RAS) has several business rules to identify such red-flags from PF data. Based on the rule output of the PF module for the company, Heckyl system computes the PF score.

Heckyl study on PF data for 1,000 companies has shown a drop in the PF score for 540+ companies during the financial year 2020. The companies from consumer services, industrials, financial institutions, commercial services and chemical sectors have led the drop in the PF score for the FY20.

Sector-wise PF Score

Moreover, 310+ companies, which have witnessed a fall in the PF score, have subsequently seen declined in the scores for other modules of RAS such as Financial, Charges, Credit Rating, Directors, Ownership, and GST.

From the list of 310+ companies, 4 companies have witnessed a decline in the scores for four modules following a fall in the PF score. Further, 12 companies have seen a fall in the scores for three modules. In addition, 85 companies have registered a drop in the scores for two modules. Moreover, 212 companies have witnessed a fall in the score for one module.

Majority of companies, which have recorded a drop in PF score from 310+ list, have subsequently seen decline in GST, charges and credit rating modules.

Module-wise Company Count

Presently, 435+ companies are having negative PF scores from the list of 540+ companies, which have recorded a drop in score for this module in FY20.

Alpha Maier Pvt Ltd is one such company whose PF score has turned negative in the middle of August 2019. Subsequent to the drop in PF score, Alpha Maier witnessed a drop in scores for 1. Credit rating (Suspended or under watch as the company is not cooperating in Sep-19); 2. Charges (Created new charge in Nov-19); 3. Directors (Resignation in Dec-19); 4. GST (Delay in filing in Jan-20); and 5. Credit rating (Rating below investment grade in Mar-20). As a result, overall risk score has dropped from positive 6.55 on Aug. 15, 2019 to negative 3.22 now.

Alpha Maier - Risk Score

List of red-flags on various modules, which dragged Alpha Maier’s overall risk score into the negative territory, are highlighted below:

Alpha Maier - PF

Bottomline: Our study has proved the potential of PF data to act as a leading indicator for identifying distressed companies with pre-default behavior ahead of time.

Heckyl’s RAS is the first of its kind innovative application that provides early warning signals through analysis of traditional and alternative datasets for identifying distress sectors and companies ahead of time.

To know more about Heckyl RAS, email us at info@heckyl.com.

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