India Inc’s debt woes ease in Q2 with lower rates, cost cuts

The capability of Indian corporations to repay debt improved sharply within the July-September interval as they negotiated higher rates of interest, reduce spending and boosted profitability amid the pandemic, an evaluation of high publicly traded corporations confirmed.

The curiosity protection ratio (ICR) of 341 corporations within the BSE500 index improved to a nine-quarter excessive of three.69 occasions, up from 1.17 occasions within the earlier quarter and a couple of.27 occasions within the September quarter of FY20, a Mint evaluation of Capitaline knowledge confirmed. BSE500 constitutes 90% of the full market capitalization of all listed corporations.

A excessive ICR signifies a larger capability to fulfill curiosity obligations from working earnings. The ratio is derived by dividing an organization’s earnings earlier than curiosity, tax, depreciation and amortization with its curiosity price. The evaluation excluded corporations within the power and monetary sectors, which comply with a special accounting process.

“The improvement in ICR of corporate India has been on account of a combination of higher earnings and lower interest outgo. With strict control on fixed overheads and cost control initiatives undertaken by companies, the profitability/earnings of many companies increased in Q2 FY21, both on an annual as well as a sequential basis. Parallelly, interest outgo was also lower as companies cut down on capex and working capital requirements, while also negotiating lower interest rates on existing borrowings. Accordingly, ICR reported recovery during the quarter,” Shamsher Dewan, vice-president and sector head, company rankings, Icra Ratings Ltd, mentioned. The ICR restoration is especially seen in cement, fertilizers, iron and metal, tyres, auto-ancillaries and constructing supplies corporations, he added.

The profitability of the businesses underneath evaluation rose within the September quarter. Adjusted web revenue (in opposition to one-time revenue or loss) of those corporations declined 8.27% year-on-year in Q2 in opposition to a 95.1% crash within the June quarter, and a progress of 21.59% within the year-ago interval.

According to Deepak Jasani, retail analysis head, HDFC Securities, corporations might have briefly used inside accruals meant for capex to repay debt, on account of uncertainty on the post-covid state of affairs.

“Covid-related disruption has led companies to tighten working capital. Also, the profitability of select sectors has improved due to lower competition and pent-up demand. Interest rates have fallen marginally but focused efforts to improve working capital, and rising profitability in some sectors have helped companies to better manage debt in Q2,” Jasani mentioned.

In the September quarter, general curiosity outgo of those corporations declined 7.19% y-o-y. In the June quarter, the curiosity prices of those corporations rose by 1.76%.

“Interest rates are the lowest in the past 15 years, and corporate credit growth has been limited for almost five years, resulting in deleveraging, which has resulted in reduced interest expense. Even though the economic slowdown has affected revenue growth, cost control has offset some of the impact on profitability,” mentioned a banking sector analyst.

The weighted common lending price on new financial institution loans declined eight foundation factors (bps) between June and September, confirmed knowledge from the Reserve Bank of India (RBI). The steepest decline was seen in loans from overseas banks at 48 bps, adopted by public sector banks at 10 bps. The general fall in rate of interest was barely extra for excellent loans at 13 bps for all business banks, knowledge confirmed. For corporations, the six-month moratorium has additionally helped in conserving money, though smaller companies had been larger beneficiaries. Initial RBI knowledge confirmed 39.1% of all company loans from banks had been underneath moratorium as on 30 April, in opposition to 65.3% of small companies. One foundation level is one-hundredth of a proportion level.

According to Credit Suisse, post-covid, incremental stress on India corporations seems restricted, and that is additionally mirrored in current commentary from financial institution managements in addition to ranking businesses, highlighting restricted demand for restructuring in company segments. The brokerage mentioned the development was led by metals (on account of higher profitability and rising costs), adopted by the telecom sector.