Top listed firms report an improvement in their debt servicing ability

There is some good news for banks struggling with higher non-performing loans in the corporate sector, as top listed firms reported an improvement in their debt servicing ability as defined by the interest coverage ratio (ICR) during nine months of FY18.

However, this was true only of firms with lower debt or light assets. Debt-laden ones reported a further decline in their debt servicing ability during 9M FY18.
 
The ICR for 1,056 firms (ex-financials, energy & IT services) improved to 4.4 during the April-December 2017 period.
 
Analysts attribute this to an improvement in corporate profitability in the past three years, coupled with a brake on incremental borrowing by corporate houses.
 
The ICR is calculated by dividing a company’s operating profit (or Ebitda) in a period by its interest payment or liability during the corresponding period.
 
Companies’ combined operating profit was up 4.2 per cent year-on-year (y-o-y) during 9M FY17.
 
A deeper reading of CARE Rating’s analysis of 2,314 companies, excluding banks and financials, suggests that the improvement in ICR has been largely due to asset-light and lightly-indebted companies.
 

An improvement in corporate profitability may do little to help banks tackle the bad loan menace if their biggest customers continue to face financial headwind.
 
Economists at CARE Ratings raised concerns over this. “The changing ICR is a good indicator of the vulnerability of
 
highly-indebted firms. The numbers suggest that the companies with higher level of outstanding debt witnessed a sharper decline in ICR in 9M FY18 relative to FY17. This is definitely a concern,” said a CARE Ratings economist team led by Madan Sabnavis.