Improving ICR of companies does not mean deleveraging is over
For India’s corporate sector to see a further improvement in interest coverage ratio (ICR) or even to maintain the current level, better profitability is the key
The interest cover ratio (ICR) of Indian non-financial companies surged to a multi-year high in the June quarter of the current fiscal year. ICR, which measures the ability of businesses to service their interest costs, stood at 4.5 times—the highest since March 2012 quarter, showed data from think tank Centre for Monitoring Indian Economy (CMIE). The ratio is derived by dividing a company’s Ebitda (earnings before interest, tax, depreciation and amortization) with its interest cost.
A high ICR ratio means that the company is more capable of meeting its interest obligations from operating earnings.
The sample size of this analysis was 3,218 companies excluding banks and financial institutions.
Industry-wise, ICR of companies in the manufacturing, textile and chemical products rose both sequentially and annually. On the other hand, consumer goods and petroleum products were the laggards on this front. Services such as tourism and transportation saw a quarter-on-quarter rise in ICR, while communications witnessed a further deterioration compared to the previous quarter, showed the CMIE data.
Akin to the trend witnessed in the previous fiscal year, improving profitability in a handful of sectors is driving the overall ICR northwards, say analysts. They add that there is still some pain left in the highly leveraged sectors as real estate, power and telecom among others.
This means even though profitability is improving, leading to higher ICR, it may not necessarily translate into significant amount of deleveraging.
So banks, especially public sector lenders that are reeling under bad loan pressures, do not have much to cheer about.
“Some amount of deleveraging is happening among corporates, but since many sectors are yet to see significant improvement in their profitability and demand scenario, meaningful deleveraging that can ease the bad loans pressure of banks is still some quarters away. Going ahead, banks are unlikely to see a sharp rise in fresh non-performing assets, but may see their provisions remain elevated over existing stressed assets,” said Soumyajit Niyogi, associate director at India Ratings and Research Pvt. Ltd.
For companies to see a further improvement in ICR or even to maintain the current level, better profitability is the key.
However, higher interest cost, increased working capital requirement, input cost inflation and a depreciating rupee could make it challenging for companies to see better Ebitda growth for the rest of the fiscal year.
To conclude, since the ICR improvement is happening only in pockets, broad-based deleveraging may take longer than anticipated.
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