The interest coverage ratio (ICR), which means a company’s ability to service interest out of its earnings witnessed a recovery in FY17 after a continuous decline since FY13 till FY16, a study by Care Ratings has noted. In its study, Care has said that based on net sales, companies in the lower turnover bracket (net sales of less than Rs 100 crore) had low interest cover and vice versa.
The classification of companies on their debt levels indicated that companies with higher debt of more than Rs 10,000 crore had deteriorating debt servicing capacilities, which is a matter for concern. On slight recovery in FY17 in ICR, Care has noted that it is because of several factors, like interest rates have come down in FY17 which has lowered the outflow on this score. Also companies have been substituting cheaper commercial papers with bank credit to take advantage of lower market rates compared with bank MCLRs.
Second, overall borrowing by the corporate sector has been subdued due to a drop in investment. Third, growth in profits in FY17 improved for a select set of companies relative to FY16. The Care study is based on a sample of 2,183 companies excluding banks, oil exploration and refineries, finance and IT firms.