Out of a sample of 3,112 non-financial companies from the Capitaline database, as many as 983 firms, or almost a third, had interest payments higher than their earnings before interest and taxes (Ebit) in fiscal year 2017 (FY17). In other words, they were what are known as zombie companies.
As the chart shows, the number of zombie firms came down a bit in FY17 from the previous year. That is unsurprising, as lending rates came down during the year. That also resulted in an increase in the number of companies having an interest cover ratio of more than 2, which indicates their Ebit was more than twice their interest payments during the year. Nevertheless, it’s worth noting that the number of zombie firms in FY17 continued to be higher than in FY14.
CARE Ratings has also done a similar exercise for a sample of 2,183 firms excluding banks, finance, information technology and oil companies, and found that firms with less than Rs100 crore in sales were the worst affected, with their average interest cover being a mere 0.47 in FY17, marginally higher than 0.46 in the previous year. In other words, zombies were to be found mostly among the smaller firms.
Unsurprisingly, CARE Ratings found that firms in the realty, infrastructure, and iron and steel sectors had an average interest cover of less than 1, which means their earnings were insufficient to service interest payments.
It’s no wonder then that the government is so keen for the Reserve Bank of India to lower rates, which will bring some relief to these zombie firms.