Temporary help for the most indebted

The Reserve Bank's cut in its repo rate, followed by a base rate (BR) cut from State Bank of India (SBI), the country's largest lender, is likely to offer some financial relief to the country's most indebted companies.

A 40-basis point cut in BR by SBI could prompt other banks to follow, leading to a decline in the cost of lending for India Inc. "Most corporate loans are priced at the BR, plus the bank.s margins. So. when a bank cuts its BR, it automatically lowers the borrowings cost for corporates," says Karthik Srinivasan, director, financial ratings, at ICRA.

The impact would, however, vary. The cost of borrowing depends on a company's credit rating and the sector it is in. "Cost of credit is greatly impacted by a corporate credit rating and track record. So, it difficult to quantify the gains to India Inc. at the macro level," adds Karthik.

The relief could, however, also be short-term for the most indebted ones. For over-leveraged companies such as GMR Infra, Adani Power, Tata Power, IRB Infra and Tata Steel, cash flow mismatch and poor profitability are bigger issues than cost of funds (see table).

"Our analysis suggests one in three corporates don't have sufficient Ebitda (operating profit) to service their interest liabilities. For the 500 largest non-financial listed borrowers, on the average, close to two-thirds of Ebitda goes in debt servicing," says Deep Narayan Mukherjee, director at India Ratings. Tuesday's cuts will, at best, bring down the above ratio to 60 per cent. "It will not change things fundamentally," he adds.

This reflects in the numbers for BSE 200 companies. At the end of FY15, nearly 70 per cent of all non-financial corporate sector debt was accounted for by a handful of larger companies in sectors such as infrastructure, highways, power, metals, crude oil refining and automobiles.

As 2014-15 ended, 37 of the most indebted non-finance companies in the BSE 200 index (out of 152) were sitting on total debt of Rs 12.67 lakh crore, up by 6.3 per cent over the previous year. The gross debt to equity ratio for all these was more than one. These companies face operational and financial headwinds; the cost of funds is a minor issue. In FY15, their blended cost of borrowing was 6.9 per cent up, around 40 bps from the previous year. But, much lower than SBI's new BR of 9.3 per cent.

However, the companies are finding it tough to service their liabilities. The combined operating profit for these 37 companies was down 2.4 per cent in FY15, while reported profit was down 39.1 per cent. In comparison, their burden was up 12.3 per cent, leading to a further decline in their interest coverage ratio. Revenue was up 1.9 per cent and their combined net worth shrunk by 0.8 per cent, resulting in a further rise in the leverage ratio.