The ability of Indian companies to meet interest payments from their earnings worsened in the March quarter, coinciding with a slowing economy, a Mint analysis of Capitaline data showed.
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 amortization) with its interest cost. A lower ratio indicates the capacity to pay interest from operating earnings is deteriorating.
The downward trend, visible even before the pandemic hit, signals reduced margin of safety for these firms against a backdrop of weak sales and profit growth. Firms 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 analyst in an Icra report on 18 June. A Mint analysis of the same firms showed aggregate net profit for the same period, after adjusting for one-time gains or losses, plunged 34% from a year ago, 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 March quarter, against a growth of 15.7% in the corresponding quarter of the last fiscal.
Aggregate interest cost of these firms rose 11.6% year-on-year in the March quarter, against an increase of 31.4% in the corresponding quarter last fiscal. The Reserve Bank of India (RBI) has lowered its repo rate by 185 basis points (bps) in FY20 and by another 40 bps in May to 4%.. 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 automobile, packaged household goods and consumer durable firms have reported negative growth in all key parameters in the March quarter, they have the requisite balance sheet strength to survive the crisis.
With earnings recovery, which is critical to improve ICR, pushed back by the pandemic at least by a year, firms may still find it difficult to meet their interest dues.
Large banks have indicated that the proportion of customers who have availed the loan repayment moratorium has been 25-35%, but for small- and mid-sized banks, the number is expected to be higher.
“At Icra, we are saying about 15% of the loan book under moratorium could possibly slip in the next few quarters. The moratorium book comprises loans where the borrower is somewhat stressed, either from the liquidity or the earnings perspective," said Anil Gupta, vice-president and sector head (financial sector ratings), Icra.
Gupta said RBI will keep observing moratorium data and if it does not decline by August, there may be some regulatory announcements. It could either be through an extension of the moratorium or a targeted debt recast.
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