Why India Inc. is better positioned on debt

CALL IT FIGHTING BACK effect or better cost management, India Inc. seems to be in a better position in terms of interest coverage ratio (ICR). However, as expected, ICR, a key metric that indicates a company’s ability to service its debt by dividing earnings before interest and tax (PBIT) by interest expense, shows varying degrees of resilience across sectors.

In Q4FY24, the ICR for the non-BFSI sector (2,259 companies) improved to 5.89x from 5.5x in Q4FY23. The improvement came despite higher interest rates, indicating that many companies managed to improve profitability, thereby improving debt sustainability. Aditi Gupta, economist at Bank of Baroda, feels that stable global commodity prices and strategic expense management contributed significantly to the improvement in coverage ratios across sectors. A 7.5% increase in expenses coupled with lower interest costs and stable commodity prices — which were earlier high and contributed to lower input costs — played a major role in improving profit margins.

Healthcare, gas transmission and industrial gases and fuels saw improvement in their ICRs, reflecting solid earnings growth on the back of higher demand and stable input prices. Automotive and ancillary sectors also saw strong demand, which contributed to higher profitability and improved ICRs. On the other hand, telecom, non-ferrous metals, FMCG and electrical appliances saw a decline in ICRs, with telecom hitting a low of 0.71x. “The telecom numbers are skewed largely because of Vodafone Idea,” says Gupta. Including accrued interest, Vi’s gross debt stands at ₹2.03 lakh crore.

But what is noteworthy is that out of 33 sectors, only 12 showed a decline in ICR. “This indicates that most sectors have managed to offset higher interest costs through improved profitability,” says Gupta. The three most indebted sectors, power, telecom and oil, have seen some improvement in their ICRs compared to Q4FY23. However, telecom’s ICR is still far from ideal, while power and energy’s ICR lags behind Q4FY22 levels.

With the RBI keeping the repo rate at 6.5% since February 2023, interest costs are expected to remain stable in the first half of FY25. However, any future hike in interest rates could have a negative impact on the ICR. Since the benefits of lower input costs have been largely realised, companies may face challenges in maintaining high profitability levels, which would mitigate the ICR. “If interest rates come down, profitability may be somewhat cushioned, but this advantage may be offset by the fact that commodity prices have stabilised,” says Gupta. However, companies that diversify their debt basket with corporate bonds and external commercial borrowings can help in containing interest costs, thereby ensuring a stable ICR.

But it is clear that to increase profits in the future, a strong revival in revenue growth is necessary.

Incidentally, total income of listed companies in the March quarter of 2024 was 8.1% higher than a year earlier. This is the highest year-on-year growth recorded by listed companies in the four quarters of FY2024, as per CMIE. Cumulative net profit of listed companies touched a record ₹3.4 lakh crore in FY2024, while net margin as a percentage of sales touched a 10-year high of 9.87% in March 2024.

Bino Pathiparampil, head of research at Elara Capital, feels the best is over for India Inc. “With margin expansion tailwinds seemingly running out, margin prospects across most sectors seem weak amidst pressures from commodity inflation, competitive pricing and weak execution,” Pathiparampil says. The only silver lining is that auto, energy, financials and industrials, which have been leading with significant earnings hikes, could perform well in fiscal 2025.