Debt servicing making life tough for smallcap, midcap companies

MUMBAI: Smallcap and midcap companies are finding it tougher to service debt than their larger rivals despite record low interest rates and a modest revival in demand, indicating a lopsided recovery for India Inc.

A Mint analysis of June quarter earnings of medium and smaller companies showed that the interest coverage ratio (ICR), a measure of how easily a company can pay interest on its debt, has declined compared to the preceding March quarter.

A lower ratio indicates a higher debt burden.

The debt service ratio of the 68 members of BSE Midcap and 530 members of the BSE Smallcap index deteriorated to 3.78 times and 3.26 times in the June quarter of FY22, respectively, from 4.13 times and 3.69 times, data from Capitaline showed.

The analysis excludes banks, financials, and oil and gas companies.

In contrast, for 34 members of the NSE Nifty index, the ratio increased to 6.32 times in the June quarter from 6.11 times in the preceding three months.

India’s largest companies have extended their lead over their smaller rivals since the covid outbreak last year by acquiring companies, cutting debt, expanding their market share, and spending heavily on technology to reach out to customers amid disruptions caused by lockdowns.

Experts said lower profitability in the June quarter due to the pandemic’s second wave hurt companies’ ability to service debt, but smaller firms were more affected than their larger peers.

“For small- and mediumsized companies, absolute borrowings went up even though the credit guarantee scheme came at a lower interest rate. Therefore, their interest costs increased due to the higher quantum of borrowing. Further, even when we look at corporate profits, the improvement is for large ones.

However, the smaller ones have been affected as their turnover has not increased to 2019 levels,” said Madan Sabnavis, chief economist, Care Ratings.

While the aggregate interest cost of BSE smallcap companies in the June quarter declined sequentially, their profits fell to a greater extent as lockdowns, though localized, disrupted supply chains and hit cash flows. Many small businesses took on more debt to ride out the second wave under the government’s sovereign-guaranteed loan programme: Emergency Credit Line Guarantee Scheme.

“With the demand contraction and corresponding weakening of earnings, the credit metrics weakened for most sectors on a sequential basis in the June quarter. However, the impact on earnings was much lower this year, and with the benefits of a lower interest rate regime, the deterioration in credit metrics was relatively curtailed from year-ago levels,” said Shamsher Dewan, vicepresident and group head, corporate ratings, Icra Ratings.