FMCG, IT and pharma fare better; real estate, infrastructure, capital goods lag.
The ability of India’s top 500 companies to service debt has dipped to a five-year low on high interest rates and a drop in operating profits, according to a note released by Crisil Research on Tuesday.
Crisil’s study covered companies in the S&P CNX 500 Index (ex-BFSI and public sector oil marketing companies, totaling 420 companies). During the September quarter, interest cost for Indian companies rose 36 per cent year-on-year, the ratings agency said.
At 8.5 per cent, repo rate — the Reserve Bank of India’s policy lending rate — is at its highest since July 2008, after the central bank raised rates 13 times between March 2010 and October 2011, in a tightening cycle widely seen to be ending.
“While the interest rate cycle has largely peaked, we believe the interest coverage ratio will remain under pressure over the next few quarters, as corporate India's sales growth could slow down on the heels of lower GDP growth,” Crisil said.
The median interest coverage ratio fell to 4.8 times in the September quarter, as against 7.8 times a year ago. The average interest coverage ratio for these companies in the past five years was 8.4 times, it said.
Companies with an interest coverage ratio below two times rose sharply to 117 in the September quarter, from 69 in the September 2010 quarter, it added.
“While, at 4.8 times, the interest coverage is still healthy, the magnitude of drop over the past few quarters is high,” Crisil's chief executive and managing director Roopa Kudva said.
Uncertainties in the West and lower GDP growth domestically will push India Inc into a slower revenue growth phase which could increase the pressure on profit and further deteriorate interest coverage ratios, she added.
For the first time in the past eight quarters, the operating profit and reported profit after tax of these companies declined in the September 2011 quarter from a year earlier, according to the study. The last decline was during the global financial crisis, in the September 2009 quarter.
Last month, Crisil said Indian companies’ profits would decline and margins shrink by 200 basis points in October-December on slower volume growth, higher raw material and interest costs and limited ability to raise prices.
Commenting on a sectoral basis, the agency’s capital markets director, Tarun Bhatia, said FMCG, information technology and pharmaceuticals fared better on interest coverage, with companies in the real estate and infrastructure sectors being the laggards.