Companies' profitability may improve in 2013/14: CRISIL

MUMBAI (Reuters) - Indian companies' profitability is likely to improve in 2013/14 if banks trim their lending rates by another 25 basis points, leading to a cut in interest costs for these firms, ratings agency CRISIL said on Tuesday.

The interest coverage ratio which measures the operating profitability to service debt will rise to 4.0 times in 2013/14 from 3.7 times in the 2012/13 if lending rates come down by 25 basis points, CRISIL said in a report.

"The reduction in interest rates will also result in a higher proportion of firms with better debt protection metrics, thereby benefiting their credit risk profile," it said.

The ratings agency expects the Reserve Bank of India to further reduce policy interest rates by 25-50 basis points over the medium term.

In the financial year 2012/13 ending March, the RBI cut the key policy repo rate by 100 basis points to 7.50 percent.

However, banks reduced their base lending rates during April-February on an average by 20 basis points, CRISIL said.

However, the ratings agency does not expect any significant revival in investment demand in 2013/14 due to a fallout of weak demand in the previous year and sees credit quality remaining vulnerable for sectors such as textile, power and construction.

"Rating downgrades may, nevertheless, continue to outnumber upgrades over the medium term, given that companies' stretched working capital cycles are unlikely to improve any time soon," the ratings agency said.

Since three years, the median rating for companies has stayed at 'CRISIL BB' compared with 'CRISIL AA' on March 31, 2008.

(Reporting by Neha Dasgupta; Editing by Anand Basu)