India Inc may breathe easy on debt servicing
NEW DELHI : Indian companies’ ability to service debt from earnings has improved in recent quarters, a Mint analysis of BSE 500 companies showed. According to experts tracking the sector, further improvement is likely in the days ahead. Interest coverage ratio (ICR), a measure of how efficiently a firm can pay interest from its earnings, has been improving in recent quarters despite higher interest rates.
ICR is calculated by dividing earnings before interest, taxes, depreciation, and amortization (Ebitda) by interest expense. Cheaper inputs and price hikes may lift profitability and gross margins, even as companies’ balance sheets remain much healthier, said analysts, with many companies holding surplus cash. Sushant Bhansali, the chief executive of Ambit Asset Management, said although interest rates have moved up sharply in the last one year, with inflation under control, and companies holding on to prices, higher gross margins and profitability are expected, raising ICR further.
The interest coverage ratio of 381 companies of BSE 500 (excluding banks and finance companies) improved to 6.75 times in the March quarter, up from 6.20 times in the December quarter. The figure, though, is still behind 8.23 times in the March quarter of 2022. Mid- and small-cap companies whose ICR had taken a bigger hit in the first half of FY23 have improved as well, though not as much as their large cap peers.
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