Nearly 500 listed companies can't meet interest outgo from their earnings

The highest proportion of firms unable to meet their interest payments from earnings was 19.1 per cent in March 2017--the quarter after demonetisation.

A total of 484 listed non-financial companies have an interest coverage ratio lower than 1, indicating their earnings are not enough to meet their interest payments.  

The number works out to 16.3 per cent of a sample of 2,971 listed companies, excluding banks and financial institutions included in the sample. This is higher than the 14.9 per cent seen for a similar sample in September last year, but lower than the 17.1 per cent in March 2019 (see adjoining chart).

In all the 484 companies had a total outstanding debt of Rs 5.6 trillion at the end of September this year; their combined interest obligations was around Rs 32,000 crore. These firms reported revenue of Rs 2.2 trillion, operating loss of Rs 77,000 crore, and net loss of Rs 1.45 trillion during the first half of the current financial year. 

In comparison, 623 firms with inadequate operating profit owed nearly Rs 6.1 trillion to lenders at the end of the March 2019 quarter. Together these firms had interest liability of around Rs 34,400 crore during six months ended March 2019, against a combined operating loss of Rs 54,000 crore, and net loss of Rs 1.13 trillion. 

Strictly speaking, the balance sheet for the second half (H2) of 2018-19 and the first half of 2019-20 are not fully comparable; many companies don’t consolidate their subsidiaries and associates in the first half of the financial year, but they do in H2, which coincides with the end of the financial year.

Business Standard looked at the numbers in six monthly intervals in September and March. The highest proportion of firms unable to meet their interest payments from earnings was 19.1 per cent in March 2017 — this was the quarter immediately after demonetisation. A similar trend was seen in March 2015 at the height of global deflation in commodity prices and immediately after the global financial crisis in March 2009.

The situation may well improve after recent liquidity measures from the Reserve Bank of India, according to experts. Interest rates have been cut to their lowest since 2010. 

There is some differential treatment among firms even in the lower interest rate regime, said Chandresh Kumar Nigam, managing director and chief executive officer at Axis Asset Management Company (AMC). Good companies get money at cheaper rates, but others are still finding it tough to raise capital. “Interest rates haven’t come down for those struggling. That is a problem,” said Nigam.

Further improvement in liquidity could be seen over the next six months, according to Rohit Seksaria, assistant fund manager at Sundaram AMC. Listed companies may have been forced to shoulder some of the capital needs of suppliers and other stakeholders who depended on under-pressure non-banking financial companies. 

“Once the liquidity scenario improves for them, it eases both sides. It improves demand for them. It improves leverage,” said Seksaria. 

The lowest proportion of firms which had earnings lower than interest was in September 2010. Gross domestic product (GDP) rate had grown 8.2 per cent during September 2010 quarter at constant prices, with a base year of 2004-05.  

The risk of downside to GDP numbers remains in the current environment, according to a November 25 India Strategy report from brokerage firm BNP Paribas Securities India. 

“The risk of potential GDP and earnings estimate downgrades, led by income uncertainty and slow interest rate cut transmission, remains. The latter could remain an issue due to fiscal constraints of the government, which has led to an increase in outstanding payables to states and suppliers, and more recently, slower PM-Kisan (Pradhan Mantri Kisan Samman Nidhi) disbursements,” said the report authored by Head of Equity Research Abhiram Eleswarapu. 

The latest GDP numbers are due to be released on Friday.