Casting a shadow: India Inc earnings feel the squeeze of interest costs

The 271 companies in our sample together spent Rs 21,183 crore on interest expenses in Q1FY24 up from Rs 15,552 crore a year ago and Rs 20,498 crore in Q4FY23

Rising interest costs have become one of the biggest headwinds for corporate earnings. Interest expenses are now the fastest-growing cost head for India Inc and are weighing down corporate earnings despite a softening of raw material and energy costs in recent quarters.
 

The combined interest expenses of the 271 listed companies, excluding banking, financial services and insurance (BFSI) and information technology (IT) services, were up 36.2 per cent year-on-year (YoY) in the 2023-24 (FY24) April-June quarter (first quarter, or Q1), growing at the fastest pace in three years. In contrast, manufacturers reported a sharp deceleration in raw material and energy costs in Q1 compared to the same period last year.
 

The companies’ combined expenses on raw materials, power, and fuel, including inventory changes, were up just 2.3 per cent YoY, down sharply from 56.1 per cent YoY growth in Q1 of 2022-23 (FY23).
 

In comparison, these companies combined net sales were up 5.9 per cent YoY in Q1FY24, a sharp deceleration from 38.6 per cent YoY in Q1FY23 and 7.8 per cent YoY growth in the fourth quarter (Q4) of FY23.

The 271 companies in the Business Standard sample collectively spent Rs. 21,183 crore on interest expenses in Q1FY24, up from Rs. 15,552 crore a year ago and Rs. 20,498 crore in Q4FY23.

The rise in interest burden in the past year has negated a large part of the gains to Corporate India from a decline in commodity and energy prices in the period. As a result, pre-tax and post-tax profits were down despite growth in operating profits, or earnings before interest, tax, depreciation, and amortisation (Ebitda), in Q1.

The combined operating profit, or Ebitda, of the companies in the Business Standard sample, was up 4.5 per cent YoY to Rs. 1.27 trillion in Q1FY24 from Rs. 1.22 trillion a year ago. However, their combined profit before tax was down 6.4 per cent YoY in Q1FY24 to Rs. 71,555 crore, while their combined net profit after tax was down 2.6 per cent YoY to Rs. 48,472 crore in Q1FY24.

For comparison, the combined interest expenses of all 385 companies that have declared their results for Q1FY24, including BFSI and IT companies, were up 42.5 per cent YoY in Q1FY24 against 12.7 per cent YoY growth in net sales (gross interest income in the case of lenders).

Banks and finance companies topped the charts with a 43.5 per cent YoY jump in interest expenses, but it was largely compensated by a 32.7 per cent YoY growth in their gross interest income.

In contrast, non-BFSI and manufacturing companies saw a record-high gap between the growth in their revenues and interest expenses. The combined net sales of the companies in the Business Standard sample in Q1FY24 grew at the lowest pace in 10 quarters due to the combined effect of a demand slowdown and price deflation for commodity producers. In contrast, companies’ interest expenses continue to accelerate due to a rise in borrowings and higher interest rates.

This has raised the interest burden on corporate earnings.

Interest expenses accounted for 2.83 per cent of companies (excluding BFSI and IT) net sales in Q1FY24, up from 2.2 per cent a year ago, and the ratio is the highest in 10 quarters.

The interest burden on earnings is, however, still lower than that in the pre-pandemic period. Interest expenses-to-net sales ratio was 3.6 per cent on average during 2018-19 (FY19) and 2019-20 (FY20).

In contrast, this ratio had declined sharply in the post-pandemic period, hitting a low of 2.08 per cent in Q4 of 2021-22 due to a decline in interest rates and deleveraging by many companies. This has acted as a tailwind for corporate earnings.

The cycle has now reversed, and interest costs have once again become a headwind for India Inc. This is similar to the situation in FY19 and FY20, when interest expenses were growing faster than net sales, resulting in muted earnings growth in the non-financial space.