INDIA INC FINANCIAL HEALTH SLIPS

Even as the September quarter earnings of Sensex companies managed to beat Street estimates, the financial health of India Inc deteriorated. According to a Credit Suisse report released on Tuesday, corporate financial health worsened in Q2 as 34% of loans were with firms with interest coverage (IC) ratio of less than one. In previous quarters, corporates with a lower ability to service debt had 31% of loans.

Interest coverage ratio compares the interest expense during a period to a company’s operating profit and reflects a company’s ability to service interest on its outstanding debt. A lower value indicates lower debt servicing ability.

The CS report observed that within the category, 80% of loans were with companies whose interest coverage was lower than one for at least four quarters in the last two years and 26% of loans were with companies that had dismal interest cover in the last eight consecutive quarters.

It further noted that concerns over debt-servicing ability of infrastructure and real estate firms persisted. “In Q2, the share of infra and real estate companies among the IC<1 companies rose as JPA, DLF and HCC were added, while Adani Ports and R Comm went off the list,” added the report prepared by analysts Ashish Gupta, Prashant Kumar and Kush Shah.

Moreover, with the loss-making companies accounting for nearly 26% of the sample debt, the net worth of these companies witnessed an erosion of 22-80% in the last two years while their debt levels went up, said the report.

On the back of continuing cash-flow strains and currency depreciation, debt levels for most of the stressed corporates increased by 5-12% in the first half of the current fiscal. These consists of eight of the nine largest companies, including Adani Enterprise, GMR Infra, Lanco Infra and JSW Steel with an interest coverage ratio of less than one.

Meanwhile, a slowdown in the economy put stress on sectors such as power and metals, which continued to depend on bank loans. “Bank loan growth to stressed sectors like power (26% y-o-y) and metals (21% y-o-y) remained high,” the Swiss-based brokerage added.