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Indian firms lose payment power

india Updated: Jan 03, 2012 21:12 IST

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Crisil Ratings on Tuesday said the repeated interest rate hikes by the Reserve Bank of India (RBI) and lower operating profits due to high input costs have pulled down Indian firms’ interest-paying ability to a five-year low.

Even though the RBI has now hinted at a pause to its rate hike cycle, Crisil said it expects the interest coverage ratio to remain under pressure on the back of a dip in overall growth expectations.

In the September quarter, interest costs for companies grew 36%, bringing down the interest coverage ratio to 4.8 times versus the 7.8 times in the year ago period and a five-year average of 8.4 times, a study conducted by the agency’s research arm revealed. At the lower end of the spectrum, companies with an interest coverage ratio below two times rose sharply to 117 in the July-September period from 69 in the same period last fiscal, it said.

“While interest coverage is still healthy at 4.8 times, the magnitude of drop over the past few quarters is high,” said Roopa Kudva, chief executive and managing director, Crisil.

Uncertainties in the West and lower gross domestic product (GDP) growth domestically will push Indian companies into a slower revenue growth phase which could increase the pressure on profit and further deteriorate interest coverage ratios, she said.

The central bank adopted a unilateral strategy of attacking the inflation number and successive hikes saw the repo rate--at which it lends to the system--growing from 5% in March 2009 to 8.5% in December 2011.

While the headline inflation number continues to be elevated, the hikes have ended up impacting growth as investment activity slowed down. The government and RBI have been repeatedly revising down GDP forecasts for the fiscal and recently governor D Subbarao had raised doubts if the economy will achieve even the 7.6% projected by him earlier.

The Crisil study also says after a gap of 8 quarters, the September quarter also witnessed a decline in the operating profit and reported profit after tax by companies.