New Delhi : A Mint analysis of BSE 500 companies showed that the ability of Indian companies to repay their debts from their profits has improved in recent quarters. Further improvements are expected in the coming days, according to experts who track the field.
New Delhi : A Mint analysis of BSE 500 companies showed that the ability of Indian companies to repay their debts from their profits has improved in recent quarters. Further improvements are expected in the coming days, according to experts who track the field.
The interest coverage ratio (ICR), which measures how efficiently a company can pay interest from its earnings, has improved in recent quarters despite rising interest rates. ICR is calculated by dividing Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) by Interest Expenses. Analysts say cheap inputs and higher prices are boosting profitability and gross margins, even though corporate balance sheets are still much healthier as many companies hold excess cash. said it could be done.
The interest coverage ratio (ICR), which measures how efficiently a company can pay interest from its earnings, has improved in recent quarters despite rising interest rates. ICR is calculated by dividing Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) by Interest Expenses. Analysts say cheap inputs and higher prices are boosting profitability and gross margins, even though corporate balance sheets are still much healthier as many companies hold excess cash. said it could be done.
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Sushant Bhansari, CEO of Ambit Asset Management, said interest rates have risen sharply over the past year, but inflation has been contained and firms have maintained their prices, thus improving gross margins and profitability. is expected to improve, and the ICR is expected to rise further.
The interest coverage ratio of 381 BSE500 companies (excluding banks and financial companies) improved to 6.75 in the March quarter from 6.20 in the December quarter. However, this figure still falls short of the 8.23 times that of the fiscal year ending March 2022.
Small- and medium-cap stocks, whose ICR took a big hit in the first half of 2023, have also improved, albeit to a lesser extent than large-cap stocks. His ICRs for small- and mid-cap stocks were 4.61x and 6.01x, up significantly from 3.81x and 4.51x in the previous two quarters, but still below levels in the same period last year.
Business interest expenses increased by 23.3% year-on-year in FY2023 as the Reserve Bank of India raised interest rates throughout the year, according to CareEdge. However, the rating agency said higher operating profit supported the improvement in the ICR in the fourth quarter of FY23, adding that both measures are still below the March 2022 quarter despite the improvement in financial ratios. rice field.
According to Sriram BKR, senior investment strategist at Geojit Financial Services, the main reason for the ICR improvement is that most companies have excess cash. In fact, surpluses have increased in the last few quarters, which is one reason why coverage looks good, Sriram said.
How to maintain a surplus will be an important point in determining the outlook for ICR. Nonetheless, earnings will increase and if earnings improve, at least his ICR for the Nifty 50 should continue to improve, Sriram added.
Deepak Jasani, head of retail research at HDFC Securities, also expects the ICR’s improving trend to continue for several quarters if economic activity continues to improve. But before the capital spending cycle starts to kick in or the working capital cycle starts to lengthen, Jasani said caution is needed. Additionally, margin pressure can affect his ICR. Jasani said mid-cap and small-cap stocks could continue to see improvement. However, SMEs are more affected when the working capital cycle is stressed, as they have limited borrowing and financing capacity and lag large caps.
Experts also believe that improving the balance sheet will drive further increases in the ICR. Ambit’s Bhansari said the balance sheets of BSE200 companies have seen the fastest improvement in five years and leverage is at its lowest level in a decade. Moreover, given the low leverage, the ability to access funds at a lower cost in the bond market is also helping mid- and small-cap companies, he added.
In general, the ICR of small and mid-caps lags behind that of large-caps because large companies can raise money from the bond market. Commercial paper and certificates of deposit also serve as a cheap alternative to bank borrowing. Because of their size and risk, small- and mid-cap stocks typically have higher costs in bond markets, which reflects higher interest payments, Bhansari said.
