Companies with higher levels of outstanding debt (₹2,500 crore and above) have witnessed sharper decline in the interest coverage ratio (ICR) in the first nine months of FY2018 compared to to FY17, thereby becoming a cause for concern, according to CARE Ratings.

ICR indicates a company’s ability to make interest payments on its debt in a timely manner. It is calculated by dividing earnings before interest and taxes by interest expense.

The credit rating agency observed that a combination of declining ICR and ICR less than 1 is a good signal to identify debt service failure.

According to a study of 2,314 companies (excluding the financial sector) with outstanding debt of ₹20,02,430 crore by the credit rating agency, while the overall ICR remained more or less unchanged for the entire sample, the companies with lower levels of debt performed better.

“The sharpest fall in ICR was for the group ₹2,500-5,000 crore. It came down from 2.26 to 1.73. This was followed by the largest debtors (₹5,000 crore and above) where the ratio declined from 3.22 to 3.08. The ICR improved for all the other debt ranges,” said Madan Sabnavis, Chief Economist, and Rucha Ranadive, Associate Economist, CARE Ratings.

The authors of the study observed that this will provide signals to the regulators on where to focus attention in terms of monitoring the vulnerability of corporates in terms of servicing debt.

Outstanding debt

Within the sample of 68 large (G-68) debtors (₹5,000 crore and above) with outstanding debt of ₹13.58 lakh crore, 23 companies with total outstanding debt of ₹2.82 lakh crore had ICR of less than 1 for first nine months of FY18.

Of this ₹72,000 crore was in steel, ₹67,000 crore in telecom, ₹38,000 crore in engineering and ₹24,000 crore in textiles.

“These would be the potential companies that would have challenges in meeting their interest commitments on debt on their books,” the study said.

Thirty two companies within G-68 witnessed an improvement in ICR in the current year. They accounted for ₹5.43 lakh crore or around 40 per cent of total debt of this sub-sample.

The balance 36 companies, which witnessed a decline in ICR, had outstanding debt of ₹8.15 lakh crore. Further, within this sample, 15 companies had ICR of less than 1 with outstanding debt of ₹2.17 lakh crore. Out of this amount, ₹1.21 lakh crore was accounted for by 4 companies: 2 in telecom, one each in steel and consumer durables.

Large debtors

Within the sample of 56 large (G-56) debtors (₹2,500 crore to ₹5,000 crore) with outstanding debt of ₹1,89,692 lakh crore, 22 had ICR of less than 1 as against 16 in FY17 and debt of ₹75,000 crore. Almost half of this was accounted for by 10 companies in steel, engineering and textiles. Further, 31companies in this set witnessed a decline in the ICR in nine months period of FY18.

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