India Inc is finding it increasingly difficult to meet interest payments on its loans. This is despite its overall borrowings remaining at manageable levels. This is based on data from the latest annual reports of 200 leading companies (excluding financial firms and banks).

Data from these CNX-500 constituents show that the rising interest rates took a toll on companies.

The overall interest cover (the number of times a company’s annual interest payout is covered by its operating profits) for the 200 companies declined from nearly 5.7 times in 2010-11 to barely 4.3 times 2011-12. A fourth of the companies had an interest cover of 2 times or less. An interest cover of 6 times is considered comfortable.

But the debt-equity ratio for these companies stood at a comfortable 0.78 times in March 2012. That is well below the 2 times that is considered comfortable. This number has not changed much from last year (0.75 times).

The contrast is explained by the steep increase in interest rates over the past year. This would have forced companies to shell out higher interest for the same level of borrowings. Between March 2011 and March 2012, the interest rate at which the most creditworthy companies could borrow from Indian banks rose from 8 per cent to 10 per cent a year.

The total borrowings for all companies rose 21 per cent between March 2011 and March 2012. This was against a 13 per cent expansion in shareholder funds (equity capital plus retained profits).

debt-equity ratio

But borrowings of companies such as Godrej Properties, GVK Power, and Lanco Infratech more than doubled during the same period with a modest growth in retained earnings. Reliance Media and Dish TV, also high on debt, reported negative net worth last fiscal. Jet Airways, Asahi India Glass, Hindustan Construction and Lanco Infratech had precarious debt-equity ratios of over 4 times. In contrast, impressive growth in the retained earnings of companies such as Shasun Pharma, Havells India, and Bata India helped lower their debt-equity ratio by a meaningful measure.

While only a small number of companies had unusually high debt, a large number was affected by rising interest rates.

The total interest cost for the 200 companies jumped by a whopping 43 per cent; while the operating profits available to meet the interest obligation increased by a paltry 9 per cent.

With interest payouts rising faster than profits, nearly a fourth of the companies saw their interest cover slip to two times or less. The steepest jump in interest cost, up 19 times, was for Aurobindo Pharma. Interest outgo of companies such as Hotel Leela, Indiabulls Real estate, Brigade Enterprises too increased manifold. However, companies such as East India Hotels, Sun Pharma benefited from repayment of borrowings and their interest outgo dipped.

>nalinakanthi.venkataraman@thehindu.co.in

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