India Inc is feeling the heat of a hard-cash regime. Indian companies that had gone on a fund-raising spree in the last few years to make the most of a booming economy are now witnessing the same financial leverage working against them.
Though the average sales growth of companies have shown only a marginal slowdown to 21 per cent during the fourth quarter ended March 31, 2008 from the same period last year, 1,030 companies that have announced their numbers so far have seen spiralling interest expenses on borrowed funds eating into their net profits. In the said period, interest expenses of these companies have grown by 36 per cent, according to the data available on the public domain.
“A lot of investments have been made in the past with borrowed money and this has pushed up interest expenses considerably. Revenues may not have yet started materialising on these investments. There will be some problem in case of a slowdown," said CJ George, managing director of Geojit Financial Services.
Worse is the case when the rate of growth in interest expenditure is taken on a full year basis. On the full-year ending March 31, 2008, interest costs have gone up by 41.7 per cent, while sales has grown 23.6 per cent.
Interest cost, being a fixed expense in nature, needs to be distributed over a strong topline (sales numbers) to mitigate its harm on profits. Now, with sales showing signs of a slowdown, companies are bearing the brunt of high interest costs.
"It is clear that financial leverage is working against companies, putting pressure on profit margins. They may need to ramp up capacities and sales quickly," said Manish Sonthalia, vice-president, equity, Motilal Oswal Securities.
Out of the 19 Sensex companies that were studied (according to data available on the BSE website), 15 have seen a substantial rise in interest expenses. For instance, information technology services major Wipro has incurred an interest expense of Rs 46.9 crore for the quarter ended March 31, 2008, up a whopping 28 times from Rs 1.6 crore it paid in the same period last year.
However, with the Reserve Bank of India recently going for another round of liquidity tightening, along with rising inflation which touched 7.57 per cent for the week ended April 19 from 7.33 per cent the previous week, are set spoil the party of leveraged companies further in a few months, according to analysts.