New Delhi: The ability of Indian Companies to repay debt remains under pressure as their financing and employee expenses remain high despite relief on raw material costs, an analysis of leading listed companies has shown.
The analysis, covering 383 companies in the BSE 500 index, showed that their interest coverage ratio (ICR) stood at 6.19 times in the December Quarter, marginally better than 6.12 times in the September quarter, and significantly lower than 7.84 times in the December 2021 quarter. The analysis excludes banks, insurance and financial services (BFSI) companies.
ICR improved only marginally in the December Quarter, compared with multi-quarter lows in the September quarter that saw input cost pressures weigh on operating performance. ICR is derived by dividing a company’s earnings before interest, taxes, depreciation, and amortization (Ebitda) by its interest cost.
Companies’ financing costs have accelerated in the past two quarters, highlighted analysts at CareEdge. In the third quarter, interest expenses of corporates surged 23% from a year earlier, compared with a 2% decline witnessed the previous year, they said.
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Interest coverage ratio is under pressure from rising interest costs, said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. Continuous interest rate hikes by the Reserve Bank of India and the sustained credit demand in the economy have pushed up interest costs of companies, said Vijayakumar, highlighting that this is more evident in the case of firms in infrastructure where the debt-equity ratio is high.
Capex spending too had picked up in the last one year as companies expecting better demand expanded capacities.
A.K. Prabhakar, head of research at IDBI Securities, said that companies in the capital goods and chemicals space had seen a significant rise in capex spending. Till the free cash flows improve after newly-added capacities come onstream, the pressure on ICR for these companies will remain.
ICR has seen pressure due to a rise in the cost of capital for the companies, said Neeraj Chadawar, head of quantitative equity research at Axis Securities. For export-oriented companies, Ebitda has also taken a hit due to lower realization and export volumes, and the overall increase in raw material cost, he added.
Apart from interest costs, higher employee costs are also putting pressure on operating performance. Data collected by Mint for 3,484 companies showed that total employee costs had risen 15% from a year earlier and around 5% sequentially, limiting improvement in operating performance. The jump in employee cost has been the highest increase in the last five quarters, said CareEdge.
It is not surprising that while revenues grew in double digits, operating profits did not see much improvement.
Smaller companies have been facing relatively higher stress. ICR for small-caps (738 companies under BSE small-cap index) stood at 3.75 times in Q3, deteriorating from 4.30 times in Q2 and was significantly lower than 5.19 times in the year-ago quarter. Even 77 companies under the BSE Mid-caps, excluding banks and financials, showed ICR at 4.39 times in the December quarter, significantly lower than 4.97 times in December 2021 quarter and only slightly better than 4.16 times in the September 2022 quarter.
Experts feel that larger companies are better off in managing inflation and, having cash on books, will be able to handle pressure in a high-interest environment.
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