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India Inc's ability to service interest cost has dipped to a four-year low as companies are making less money from the operations, while interest costs has been rising at a much faster pace. In the last four years, rising debt levels has seen interests costs more than double to Rs 1.01 lakh crore till FY13 for BSE 200 companies (ex banks and finance).
As a result, the interest cover has slipped to about six times from more than nine times four years ago. For many other companies which much higher debt, and lower operating profits, this number has slipped to much lower levels suggesting decreasing ability to service interest through operations.
Says Deep Mukherjee, director corporates, India Ratings: “The stress on the interest payments has been on the rise, and it's a big problem. Between 2011 and 2013 we have seen the sharpest deterioration in credit matrices a lot big ticket blow ups in credit or in debt of companies and is reflected in corporate debt restructuring on in NPAs. This situation has improved but not by much.”
The Reserve Bank of India has spared the corporate sector further stress by holding back a hike in interest rates. But analysts reckon that if the rate hikes increase by more than 50 basis points, a new wave of rising debt problems cannot be ruled out. Says Mukherjee: “If the interest rates does not rise, and the economic conditions remains as it, we may expect some defaults but no flurry. If interest rates rises by more than 50 basis points, debt stress may shoot up considerably.”
It has been quite tough for Indian companies with rising debt. Indian companies had raised significant debt from the period between FY2003-08 to fund their growth and expansions. But the ensuing slowdown post the Lehman crisis has put the spanner on the growth wheels. Analysts say that the worst is not over yet.
Says Sonam Udasi, head of research, IDBI Capital: “There is little operating cash flow improvements for the capital intensive segments. The way GDP has been shaping up, the top line will take a while to improve. With the US announcing a tapering, the easy money flow will also slow down. In that sense, the cost of funds is going to remain high.”
Due to rising rates and lower profits, many companies had to undergo corporate debt restructuring. Banks restructured Rs 75,000 worth of loans under the corporate debt restructuring in FY 13, which is more than 100 percent increase over the last financial year.
In the first half of the current year, the situation seems to have eased, but the stress still remains. Interest costs has risen by 29.44 percent in the first six months to Rs 50684 crore, for the BSE 200 companies, whereas profits increased merely 17 percent to Rs 2.97 lakh crore. As a result, the credit matrix to measure repayment ability has further slipped to 5.86 times. Analysts say that it could be a while before things improve. In the capital intensive space, the stress is even more acute.
Says Udasi: “There could be stress on interest costs for the next one year. It's difficult to see the interests rate coming down from these levels or the operating profits to improve from here. So this stress will continue for the next six months to a year.”
In the last three months, the RBI increased the repo rate by 50 basis points to 7.75 percent. The RBI paused its rate hike mode in the last credit policy.
