India Inc’s ability to repay loans deteriorates in fourth quarter

The ability of Indian companies to pay loan interest from their earnings worsened in the March quarter, a Mint analysis of Capitaline data showed, coinciding with falling earnings and a slowing economy.

The interest coverage ratio (ICR) of 311 companies in the BSE 500 index fell to 2.73 in the March quarter, the lowest in at least 24 quarters, from 3.89 in the December quarter and 4.48 a year ago. The ratio is derived by dividing a company’s Ebitda (earnings before interest, tax, depreciation and amortisation) with its interest cost. A lower ratio indicates less capability to pay interest from operating earnings.

The downward trend, visible even before the Covid-19 pandemic hit, signals reduced margin of safety for these companies against a backdrop of weak sales and profit growth. Companies under review exclude banks, financials, and oil and gas companies. The Indian economy grew at 3.1% in the March quarter, the slowest in 11 years, dragging the full-year expansion to 4.2% against 6.1% in FY19.

“The interest coverage was impacted by weakening earnings,” said analysts. A Mint analysis of the same companies showed that aggregate net profit for the same period, after adjusting for one-time gains or losses, plunged 33.95% year-on-year, the lowest in at least 20 quarters, from a growth of 5.29% in the March quarter of FY19. Net sales also declined 8.29% in the quarter ended March, against a growth of 15.72% corresponding quarter last fiscal.

Aggregate interest cost of these companies rose 11.56% year-on-year in the March quarter, against an increase of 31.37% in the corresponding quarter last fiscal. The Reserve Bank of India (RBI) has lowered its repo rate by 185 basis points (bps) to 4% in the one-year period ending May. Lenders have also lowered their interest rates in that period, tracking the decline in the repo rate.

According to Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, though sectors such as automobile, FMCG and consumer durables have reported negative growth in all key parameters in Q4FY20, they have the requisite balance sheet strength to survive the crisis. “The automobile sector has a debt to equity (DE) ratio of 0.20 and debt service coverage ratio (DSCR) and interest service coverage ratio (ISCR) of 1.57 and 5.56 respectively,” he wrote in a note on July 3.

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