The Brief: Why India Inc. Is Better Placed On Debt

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

In Q4 FY24, the ICR for the non-BFSI sector (2,259 companies) improved to 5.89x from 5.5x in Q4 FY23. The improvement came despite higher interest rates, indicating that many companies have managed to enhance profitability, thereby improving debt servicing capabilities. Aditi Gupta, economist at Bank of Baroda, believes stable global commodity prices and strategic management of expenditures significantly contributed to the improved coverage ratios across sectors. Expenses growth at 7.5%, coupled with lower interest costs and stable commodity prices — which had previously been elevated and contributed to lower input costs — played an important role in improving profit margins.

Healthcare, gas transmission, and industrial gases & fuels saw improvement in their ICRs, reflecting robust profit growth owing to increased demand and stable input prices. The automobile and ancillaries sector also showed strong demand, contributing to higher profitability and an improved ICR. Conversely, telecom, non-ferrous metals, FMCG, and electricals saw ICR declines with telecom hitting a low at 0.71x. “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’s notable is that of the 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 top three highly indebted sectors, power, telecom, and crude oil, saw some improvement in their ICRs compared to Q4 FY23. However, the telecom sector’s ICR is still less than ideal, while crude energy and power sectors’ ICR lag their Q4 FY22 levels.

With the RBI maintaining the repo rate at 6.5% since February 2023, interest costs are expected to remain stable in the first half of FY25. But any future rate hikes could impact the ICR negatively. As benefits from lower input costs have been largely realised, companies might face headwinds in maintaining high profitability levels, thus moderating the ICR. “If interest rates head lower, there could be some cushion to profitability, but that advantage could be nullified by the fact that commodity prices have stabilised,” feels Gupta. However, firms that are diversifying their debt basket through corporate bonds and external commercial borrowings might help contain interest costs, thus ensuring a stable ICR.

But what’s clear is that a strong recovery in revenue growth is a must to boost earnings going forward.

Incidentally, the total income of listed companies in the March 2024 quarter was 8.1% higher than a year ago. This is the highest YoY growth recorded by listed companies during the four quarters of FY24, as per CMIE. The cumulative net profit of listed firms touched a record ₹3.4 lakh crore in FY24, while net margin as a percentage of sales hit a 10-year high of 9.87% in March 2024.

Bino Pathiparampil, head of research at Elara Capital, believes the best is over for India Inc. “With margin expansion tailwinds appearing to have run their course, margins outlook across most sectors looks soft amidst pressures from commodity inflation, competitive pricing and weak realisation,” mentions Pathiparampil. The only positive is that auto, energy, financials, and industrials, which led with substantial earnings upgrades, might manage to put up a strong performance in FY25.