Interest coverage ratio of unlisted cos at 30-year high, shows data

Uptick in FY24 mirrors similar trend in the listed space. The second of a 3-part series on unlisted firms' financials looks at their debt

Excess earnings of unlisted companies over and above their interest costs are at a record level.

 

The interest-coverage ratio of 2.94 is the highest going back to 1990-91, according to numbers from the Centre for Monitoring Indian Economy (CMIE).

 

The ratio measures earnings relative to every rupee to be paid as interest on outstanding debt. The uptick mirrors a similar improving trend in the listed space, where the ratio (5.28) is the highest in 16 years.

 

The analysis is based on the data on 4,231 unlisted companies for 2023-24 (FY24) — what is available as of December-end.

 

This represents roughly a fifth of the usual number of companies for which the results are available for previous years at the CMIE, and can be considered broadly indicative of the trend. The number of listed companies considered is 3,575.

 

The sample in both cases excludes financial companies. Unlisted companies declare their results with a lag. 

 

The numbers reflect a growing trend towards reducing outstanding loans that companies have followed in recent years. The debt/equity ratio is a measure of borrowing relative to the capital invested by company owners. Higher levels indicate increased indebtedness. The debt/equity level for unlisted companies is also the lowest on record at 1.1. The level for listed companies has similarly touched 0.52, the lowest ever in the data going back to FY91.

 

Companies typically increase borrowing when they are looking to increase capacity such as by setting up factories, said Dwijendra Srivastava, chief investment officer (debt), Sundaram Asset Management Company, whose funds invest in corporate debt, including those of unlisted firms. The lacklustre demand environment has meant a limited appetite for such investment, which has a dampening effect on borrowing. The cost of capital tends to be slightly higher for unlisted companies and the current deleveraging trend is unlikely to change while consumer sentiment is lacklustre, according to him.

 

“Demand is limited,” he said.

 

Debraj Lahiri, fund manager, Bandhan Mutual Fund, suggested funding for acquisition could be one reason for increased borrowing in select cases.

 

“We may not see broad-based manufacturing capex picking up in the near future … certain sectors if there are opportunistic acquisitions ... .debt can go up,” he said.

 

Nevertheless, companies in the unlisted space have increased borrowing more than their listed peers. Borrowing by non-finance companies rose 6.9 per cent in the unlisted space while it was 0.1 per cent for listed companies. Relatively large increases in borrowing are seen in other key sectors, including manufacturing, electricity, and services (chart 3).

 

Some large companies have seen a sharper rise in the interest coverage ratio. Samsung India has seen its interest coverage ratio rise to 50.1 in FY24 from 17.1 in FY23 amid lower interest outgo and higher operating profit, show calculations based on the Capitaline data. Improvements are also seen in others like Shell India (23.1 in FY24 compared to 9.3 in FY23) and automobile company Daimler India (96.7 in FY24 compared to 48.1 in FY23).

 

(The third part will deal with capex by unlisted companies)