India Inc braves rising interest rates by unleashing higher sales

India Inc braves rising interest rates by unleashing higher sales
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First Published: Tue, May 15 2007. 12 25 AM IST

Updated: Tue, May 15 2007. 12 25 AM IST
Mumbai: Indian companies appear to have weathered the impact of rising interest rates, courtesy of higher sales.
A Mint analysis of financial results of 1,152 companies that have declared their results through March shows that their combined interest cost has gone up by close to 12%, from Rs12,890 crore in 2005-06 to Rs14,427 crore in 2006-07.
But the rising interest burden has not eaten into their profits as net sales have gone up at a faster pace.
Despite close to the12% rise in their overall interest burden, the interest cost as a percentage of net sales for these firms has actually gone down, from 2.09% to 1.82%. This is on account of a higher growth in net sales. Net sales of these firms have gone up by close to 29%, from Rs6,17,085 crore in 2005-06 to Rs7,94,770 crore in 2006-07.
Interest cover at these firms, however, has gone up to some extent: from 21.51 % in 2005-06 to 25.47% last year. Interest cover refers to the number of times a firm’s interest payout is covered by its adjusted net profit (reported net profit minus extraordinary items). It determines a firms’ ability to service debt.
“At 25.47% interest cover, India Inc.’s profitability is over 25 times its interest cost. It can go up from here. At this point, there is nothing to be worried about,” said the chief financial officer of a capital goods company who did not want to be named.
Collectively, these firms that Mint looked at represent about one-third of listed Indian firms.
So far, about 1,600 firms have announced financial results for the full year ending March. However, only 1,152 firms have been taken into account for this study.
Commercial banks, mortgage firms and all non-banking firms have been kept out of the analysis. This is because banks and finance firms deal with public deposits and pay interest on them. In a rising interest rate scenario, their cost of deposits goes up but they cover the cost by raising their lending rates. This is not the case with firms in the manufacturing and services sectors.
Economists and analysts at brokerages say that the impact of rising interest rates will, however, be felt in the current financial year.
“One does not see an immediate impact of a higher interest rates on corporations’ bottom line. There is always a lag effect. We will see the impact this year,” said the chief economist of a large Mumbai-based conglomerate on condition of anonymity.
He, however, added that corporations by and large have become more efficient and have drastically cut their working capital requirements through better management of inventory.
“So, we will not see the interest burden eating into corporate profits unless there is a substantial hike in rates from this level,” he said.
Amitabh Chakraborty, president, equities, Religare Securities, a local brokerage, said: “It’s too premature to analyse the impact of interest rate hikes on balance sheets of companies.” Chakraborty also said that interest rates had peaked and were unlikely to have any significant dampening effect on capex plans of the companies.
“Most of the firms have restructured their balance sheets by raising money from all sources. They are not dependent on bank borrowings alone and this makes them less susceptible to rising interest costs,” he pointed out.
Over the past year, the central bank has raised its policy rate by 1.25 percentage points in five stages.
It also tightened money supply by raising banks’ cash reserves kept with itself in the January-March quarter of the last financial year.
As a result, interest costs for these companies have risen sharply in the last quarter, by over 12.43% over the October-December quarter.
In absolute term, the quarterly interest burden of these 1,152 firms rose from around Rs3,550 crore to close to Rs4,000 crore in the last quarter.
However, despite this, interest cost as a percentage of net sales and net profit virtually remained in the same band through out the year.
Rancha Monga contributed to this story.
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First Published: Tue, May 15 2007. 12 25 AM IST
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