E-Paper
India Inc’s debt woes ease in Q2 with lower rates, cost cuts
The interest coverage ratio (ICR) of 341 companies in the BSE500 index improved to a nine-quarter high of 3.69 times, up from 1.17 times in the previous quarter and 2.27 times in the September quarter of FY20, a Mint analysis of Capitaline data showed. BSE500 constitutes 90% of the total market capitalization of all listed companies.
The ability of Indian companies to repay debt improved sharply in the July-September period as they negotiated better interest rates, cut spending and boosted profitability amid the pandemic, an analysis of top publicly traded companies showed.
The interest coverage ratio (ICR) of 341 companies in the BSE500 index improved to a nine-quarter high of 3.69 times, up from 1.17 times in the previous quarter and 2.27 times in the September quarter of FY20, a Mint analysis of Capitaline data showed. BSE500 constitutes 90% of the total market capitalization of all listed companies.
A high ICR indicates a greater ability to meet interest obligations from operating earnings. The ratio is derived by dividing a company’s earnings before interest, tax, depreciation and amortization with its interest cost. The review excluded companies in the energy and financial sectors, which follow a different accounting procedure.
“The improvement in ICR of corporate India has been on account of a combination of higher earnings and lower interest outgo. With strict control on fixed overheads and cost control initiatives undertaken by companies, the profitability/earnings of many companies increased in Q2 FY21, both on an annual as well as a sequential basis. Parallelly, interest outgo was also lower as companies cut down on capex and working capital requirements, while also negotiating lower interest rates on existing borrowings. Accordingly, ICR reported recovery during the quarter,” Shamsher Dewan, vice-president and sector head, corporate ratings, Icra Ratings Ltd, said. The ICR recovery is particularly visible in cement, fertilizers, iron and steel, tyres, auto-ancillaries and building materials companies, he added.
The profitability of the companies under review rose in the September quarter. Adjusted net profit (against one-time profit or loss) of these companies declined 8.27% year-on-year in Q2 against a 95.1% crash in the June quarter, and a growth of 21.59% in the year-ago period.
According to Deepak Jasani, retail research head, HDFC Securities, companies may have temporarily used internal accruals meant for capex to repay debt, due to uncertainty on the post-covid situation.
“Covid-related disruption has led companies to tighten working capital. Also, the profitability of select sectors has improved due to lower competition and pent-up demand. Interest rates have fallen marginally but focused efforts to improve working capital, and rising profitability in some sectors have helped companies to better manage debt in Q2,” Jasani said.
In the September quarter, overall interest outgo of these firms declined 7.19% y-o-y. In the June quarter, the interest costs of these firms rose by 1.76%.
“Interest rates are the lowest in the past 15 years, and corporate credit growth has been limited for almost five years, resulting in deleveraging, which has resulted in reduced interest expense. Even though the economic slowdown has affected revenue growth, cost control has offset some of the impact on profitability,” said a banking sector analyst.
The weighted average lending rate on new bank loans declined eight basis points (bps) between June and September, showed data from the Reserve Bank of India (RBI). The steepest decline was seen in loans from foreign banks at 48 bps, followed by public sector banks at 10 bps. The overall fall in interest rate was slightly more for outstanding loans at 13 bps for all commercial banks, data showed. For firms, the six-month moratorium has also helped in conserving cash, although smaller businesses were bigger beneficiaries. Initial RBI data showed 39.1% of all corporate loans from banks were under moratorium as on 30 April, against 65.3% of small businesses. One basis point is one-hundredth of a percentage point.
According to Credit Suisse, post-covid, incremental stress on India companies appears limited, and this is also reflected in recent commentary from bank managements as well as rating agencies, highlighting limited demand for restructuring in corporate segments. The brokerage said the improvement was led by metals (due to better profitability and rising prices), followed by the telecom sector.
