The bloated credit profiles of corporates make their balance sheets vulnerable due to challenges from infrastructure, commodity meltdown and low consumption demand, leaving their interest coverage ability very weak, says a report.
With continuous challenges emanating on both the domestic and global front, the corporate sector ended last fiscal on a subdued note, said the ICRA report.
“Nearly 21 per cent of the entire debt (Rs 26,71,600 crore) of 507 companies in our sample had interest cover of less than 1x as of March 2016,” ICRA’s senior group Vice-President and co-head for corporate sector ratings Subrata Ray said in the report.
Around 65 per cent of this debt with interest cover less than 1x belongs to companies in three sectors — infrastructure & construction, power and steel, he noted.
“The slow pace of improvement in structural challenges in the infrastructure sector, the global commodity meltdown and anaemic trends across domestic consumption-driven sectors continued to be the highlights of corporate performance during 2015-16,” said the ICRA report.
Sectors such as metals, especially iron & steel, witnessed a sharp contraction in coverage indicators during the year as earnings were adversely impacted by a decline in steel prices as well as competition from cheaper imports.
The pressure on debt-servicing indicators in the infrastructure and construction sectors also remained unabated, owing to continuation of structural challenges and limited improvement in balance sheet strength.
Among the most stretched sectors, airlines and sugar, however, saw an improvement in interest coverage due to favourable industry-specific developments.
From the profitability perspective, 2015-16 was relatively better as benign commodity prices benefited most sectors, even as earnings of metal companies, especially steel, contracted sharply during the year.
“The EBITDA margins for our aggregate sample of 507 companies improved by 70 basis points to 17.3 per cent in the year,” Ray said.
Margins expanded more in the second half of the fiscal as earnings of consumption-driven sectors benefited from the volume uptick during the festive season.
Margins of the commodity-driven sectors also stabilised with a marginal recovery in international commodity prices and imposition of minimum import price, the report said.
EBITDA margins expanded by 120 basis points on a year-on-year basis in the fourth quarter of the fiscal.
Some of the key sectors which witnessed improvement in margins on account of lower input cost during the year included airlines, auto, power, FMCG and tyres, it added.