Finance costs of top Indian firms drop during pandemic

The finance cost of most of the leveraged Nifty 500 companies came down significantly in Apr-Jun as the lockdown affected demand and sales during the quarter, resulting in lower working capital requirements.

But, the burden could have shifted to many small and medium enterprise vendors to these companies, who lack the negotiating power and could have seen goods being returned.

While some of the companies under review might have availed moratorium offered by the Reserve Bank of India on interest and loan repayments, it would not have reduced their finance costs for the quarter.

This is because accounting standards require interest obligations to be recorded as 'interest due but not paid' in the profit and loss account.

Of the 251 non-banking and non-financial companies from the Nifty 500, whose June quarter finance costs were at least 25 mln rupees, the finance cost of 154 companies fell quarter-on-quarter, an analysis of consolidated financial data from Cogencis Corporate Fundamental Database showed.

The fall in revenue was a major factor for 129 of the 154 companies that saw a fall in interest expenses in Apr-Jun.

In comparison, sales were lower of only 67 of the 109 companies that had seen a fall in interest expenses in Jan-Mar. The median of the onquarter change in finance cost and revenue of the 251 analysed companies was (-)5.1% and (-)27.7%, respectively, in Apr-Jun, compared with 1% and (-)4% in Jan-Mar.

This shows that in the June quarter the sharp fall in revenues led to a fall in finance cost, unlike in the previous quarter when revenues fell a little but the finance costs went up marginally.

According to Deepak Jasani, head of retail research at HDFC Securities, the listed companies whose revenues were hit the most due to lockdowns cut their inventories substantially. This slashed their working capital needs and their interest costs fell. The sector that showed such a trend prominently was the manufacturing sector. Revenue of companies in this sector had declined in the March quarter itself but the fall in their revenue was seven times higher in the June quarter. The accentuated revenue fall led to a fall in finance costs for these companies in Apr-Jun but was steady in the previous quarter. Based on their median values, 86 companies from the manufacturing sector saw revenues fall 37% on quarter in AprJun which was worse than the 5.3% fall in Jan-Mar.