India Inc’s debt servicing ability declines in H1FY23

The three months ended 30 September were the first full quarter since the Reserve Bank of India (RBI) began raising interest rates in early May.

The ratio declined to 6.1, that is, the combined operating profits of the companies were 6.1 times their interest expenses. The figure was at an 11-year high of 7.1 in April-September of 2021. Lower ICR denotes reduced ability to repay debt, and is likely to be the result of greater interest expenses, lower profitability, or both.

Only the April-September period of each year was used for the analysis for better comparability.

ICR is the ratio of Ebitda (earnings before interest, taxes, depreciation and amortization) and interest expenses. In H1FY23, aggregate profit of the companies in the sample contracted nearly 12% year-on-year and interest expenses shot up around 14% after a fall in the corresponding period of the previous financial year amid ultra-loose monetary policy and significant deleveraging by India Inc.

With a policy reversal to contain rising inflation, RBI has raised short-term rates by 190 basis points (bps) since May, which has resulted in a 82-basis-point rise in the weighted average lending rates for scheduled commercial banks, showed RBI data.

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Besides, high input cost pressure, which has shot up nearly 500 bps since FY21, currently standing at 43.1% of net sales, adds to the concerns.

“Once inflation comes under control, interest rates too will come down. However, this may take a few quarters more. Till such time, we may witness further deterioration in ICR,” Deepak Jasani, head of retail research, HDFC Securities, said. “However, we have seen worse ICR in the past and, hence, as of now there may not be any need to be alarmed.”

When the central bank had raised repo rates by 375 bps between March 2010 and October 2011, the ICR for the sample had fallen sharply to 6.1 in H1 FY12 against 9.6 in H1FY11. The profits too had declined during the period.

In terms of size, the median ICR of larger firms (revenue above ₹10,000 crore in H1FY23) declined to 11.5 in H1 FY23 compared to 12.3 a year ago, while for companies with a turnover of less than ₹500 crore it jumped marginally.

“Large-caps were impacted more as they found it difficult to maintain profitability under the circumstances given their need to operate at a particular capacity and dependence on export markets,” he said. “Small-cap companies on the other hand could manage this well given their small scale of operations.”

The sectoral show was a mixed bag. Capital-intensive sectors such as metals, oil and gas, and textiles, which were impacted by a global slowdown, saw a significant fall in interest cover, down 540 bps, 340 bps and 130 bps, respectively. The ones that bucked the trend include consumer durables, hospitality and pharma companies.