Firms better placed to service debt
Interest coverage ratio improves to 3.95 times in Q1
In what could be music to lenders’ ears, corporate India is showing initial signs of improvement in its debt-servicing capability.
The combined interest coverage ratio (ICR) for 1,822 companies, excluding financial and oil and gas companies, improved to 3.95 times during the first quarter of 2017-18 from 3.85 times in the previous quarter. This means corporate India’s operating profit is now enough to cover nearly four quarters of interest payments. However, on a year-on-year basis, the ICR worsened. The ratio was 4.1 during the April-June 2016 period. The ratio of operating profit and interest obligation, the ICR indicates a company’s debt-servicing capability.
The improvement in the ICR in the June quarter was led by infrastructure and the capital intensive sectors, such as power, telecom, metals, mining, and construction. This recovery has, however, come at the expense of other manufacturing and services sectors including exporters, most of whom are users of goods and services produced by the former sectors. The ICR for these industries together declined to a nine-quarter low in the June quarter as profitability took a knock, hit by a combination of poor revenue growth, sticky raw material, and employee cost.
“There is a case for a cyclical upturn in economic and corporate growth in the current fiscal year led by higher government spending and a surge in commodities prices, such as metal, mining products and sugar. This is benefitting companies in sectors such as construction, infrastructure, metals and mining sectors,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.
The combined ICR for construction and infra firms, such as Adani Ports, Jaiprakash Associates, IRB Infrastructure, Sadbhav Engineering, NCC, and Hindustan Construction Co, among others, improved to a four-year high of 1.8 times during the quarter against 0.5 in the preceding quarter and 1.3 a year ago. Companies’ combined operating profit was up 21.5 per cent y-o-y in the first quarter against 11 per cent y-o-y decline in interest payments.
Experts, however, doubt a sustainable turnaround in the financial fortunes of construction and infrastructure companies given macroeconomic headwinds. “Many construction and infrastructure firms have reported an uptick in revenue growth and order books in the past few quarters. Their balance sheets, however, suggest that growth has been achieved by accumulating working capital and inventory which may start biting in due course,” said G Chokkalingam, managing director, Equinomics Research & Advisory.
Metal and mining companies also continue to gain from higher prices for their output. Their combined ICR improved to 2.3 times during the current quarter from 1.6 a year ago, though it deteriorated on a sequential basis driven by faster profit growth. The sector’s combined operating profit including other income was up 47.5 per cent in the first quarter against two per cent y-oy increase in interest payments.
Power generation and transmission companies also reported an improvement in their ICR from 1.9 times in the March 2017 quarter to 2.7 during the June quarter period. One basis point is one-hundredth of a per cent. For power companies, operating profit was up 9.2 per cent y-o-y in the first quarter against a 5.3 per cent decline in interest payments.
Telecom operators such as Bharti Airtel, Idea Cellular, Tata Communications and Reliance Communications also reported an improvement in their ICR during the quarter as it improved to 1.7 from 0.7 in the previous quarter and 1.6 a year ago.
The gains for infrastructure and metal companies are, however, coming at the cost of manufacturers and service providers in sectors such as auto ancillaries, capital goods, software services, pharmaceuticals and hospitality among others. The combined ICR for companies ex-financial, energy, infrastructure and metals declined to nine-quarter low in the last quarter as these companies continue to lose competitiveness due to a combination of poor demand growth at home and a steadily rising operating cost including employee salary and wages.
A recent rise in the rupee against the dollar has also played a part here, especially in the export-intensive sectors such as technology and pharmaceuticals.