Credit metrics of India Inc may improve to 4.5-5 times in Q3 FY24: ICRA

India Inc's credit metrics are likely to show slight sequential improvement in the third quarter of the current fiscal, with interest coverage increasing to 4.5-5 times, rating agency Icra said on Friday.

This would benefit from improved earnings of corporate India on the back of continuing, albeit moderating, tailwinds from commodity prices and seasonally strong demand during the recently concluded festive season, it said in a release.

Icra's analysis of the second quarter of 2023-24 performance of 601 listed companies (excluding financial sector entities) revealed improved operating profit margins (OPM), increasing by 398 bps and 64 bps on a year-on-year and sequential basis, respectively, it said.

This was primarily aided by softening in commodity prices. However, while the input costs softened in recent months, they remain elevated compared to the historic levels, and accordingly, India Inc's OPM is yet to revive to its historic highs, the agency said.

"The 1.6 per cent year-on-year (YoY) and 0.1 per cent sequential revenue growth for corporate India in Q2 FY2024 was supported by steady demand. However, the YoY revenue expansion was curtailed to an extent due to a general decline in the realisation levels amidst softening of input costs for most of the sectors," said Kinjal Shah, Vice President and Co-Group Head Corporate Ratings, Icra Limited.

The agency said improvement in earnings coupled with a pause in rate hikes by the Reserve Bank's Monetary Policy Committee in the recent past (thereby restricting the upward movement in finance cost), led to year-on-year improvement in interest coverage ratio to 4.5 times for the second quarter of 2023-24 from 3.9 times in the corresponding period of 2022-23 for Icra's sample set companies.

However, it remained flattish on a sequential basis.

An expected revival in earnings coupled with a pause on rate hike is likely to result in an improvement in India Inc's interest coverage to 4.5-5.0 times in the third quarter of FY24, although inflationary trends remain monitorable in the long run, Icra said.