India Inc’s interest cover weakened in Q2 amid slower revenue and profit growth

Rising interest burden and lower growth in operating profit has impacted India Inc’s interest coverage ratio at the overall level. It fell to a seven-quarter low of 4.8 percent in the September quarter for a sample of 1,950 companies excluding the banking and finance sector. It was 5.7% in the previous quarter and 5.4% in the year-ago quarter. The ratio is calculated as profit before interest and tax (PBIT) divided by interest tax. It shows the ease with which the company can cover interest expense or service debt; A higher ratio is desirable.

Deepak Jasani, head of retail research at HDFC Securities, said, “Interest expenses have increased sharply year-on-year due to higher (interest) rates and working capital requirements. For the sample, interest expense rose to a three-quarter high of 7.2% year-on-year in the three months to September while overall top-line growth was at a three-quarter low of 4.9%. Election and flood situation in different parts of the country during monsoon season. Additionally, raw material costs as a percentage of revenue rose to 35.1% from 34% in the year-ago quarter. This impacted EBIT, which fell 4.9% year-on-year. That in turn weakened the interest coverage ratio for the quarter.

While interest rates in the economy have remained firm, higher working capital requirements have led to an increase in total borrowing by companies. Net debt for a sample of BSE 500 companies excluding lenders rose 13.9% year-on-year to Rs. 29.8 lakh crore has happened.

In the coming quarters, revenue growth and recovery in benign input costs will be crucial for a pick-up in interest coverage. For the September quarter, the overall performance of the sample was affected by a slowdown in consumption and a weak performance by the metals and oil and gas sectors. Analysts expect a recovery in government spending in the second half of the current fiscal, which could help companies stage a recovery.