Companies’ financial position improves in March quarter

Companies’ financial position improves in March quarter
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First Published: Sun, May 31 2009. 10 43 PM IST

The interest cover has improved for all categories of firms, from the smallest, or those with quarterly sales below Rs100 crore, to the largest, or firms with quarterly sales above Rs1,000 crore.
The interest cover has improved for all categories of firms, from the smallest, or those with quarterly sales below Rs100 crore, to the largest, or firms with quarterly sales above Rs1,000 crore.
Updated: Sun, May 31 2009. 10 43 PM IST
The increase in liquidity and the lowering of interest rates has obviously had a salutary impact on the financial position of companies. At the same time, though, it’s also true that profitability at many firms is under considerable strain. The question is: Has the fall in interest rates offset the impact of falling profits? The March quarter company results show that it has, with the interest cover (a measure of companies’ ability to meet their interest payments) showing an improvement over the December quarter. Interest cover is the number of times a company can pay interest from its available earnings, and is calculated by dividing a firm’s earnings before interest and taxes by interest paid.
The interest cover has improved for all categories of firms, from the smallest, or those with quarterly sales below Rs100 crore, to the largest, or firms with quarterly sales above Rs1,000 crore.
The lower interest cover is a trend reversal from the December quarter, when analysts were concerned that many companies were heading into a debt trap. As a matter of fact, before the March quarter, the interest cover ratio for firms had consistently declined over the past seven quarters, as interest rates rose even as firms had no option but to take on more debt due to a lack of other funding options. Moreover, with a deteriorating operating environment, working capital cycles were stretched, again leading to higher borrowing requirements. The decline in interest cover ratio has also had an impact on the credit quality of Indian firms.
As the chart shows, however, the interest cover has improved for all categories of firms, from the smallest, or those with quarterly sales below Rs100 crore, to the largest, or firms with quarterly sales above Rs1,000 crore. The biggest improvement has been for the largest firms, with their interest cover increasing from 6.9 in the December quarter to 8.86 in the March quarter. In comparison, the interest cover of the firms with sales below Rs100 crore is much less, at 1.34 in the March quarter, although there has been a slight improvement from the preceding quarter. Of course, interest cover is still far lower than in the March 2008 quarter.
What of the real estate sector, which is the most vulnerable to high interest rates? Strangely enough, the interest cover ratio for this sector continued to fall even in the March quarter, to 6.32 from 6.89 in the December quarter.
The concern, though, is that interest rates may not remain low if the government goes ahead with a further dose of fiscal stimulus. As a Kotak Mahindra Bank Ltd report by economists Indranil Pan and Kaushik Das points out, “The 10-year benchmark bond yields could rise higher in the second half of the financial year as any increase in the borrowing programme could be back-ended. By this time, the headline WPI (Wholesale Price Index) inflation should also have reversed course and come back into the positive zone. The fiscal year could end with the 10-year benchmark yield at around 6.75-7.25%.” That could lead to higher interest costs in future. While part of that will be neutralized by the pick-up in demand, it’s worth noting that with commodity prices also moving up, margins too may again come under pressure.
Write to us at marktomarket@livemint.com
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First Published: Sun, May 31 2009. 10 43 PM IST