Rise in rates way higher than sales growth for cos in Q2

Written by Pradip Kumar Dey | Mumbai | Updated: Dec 5 2011, 05:46am hrs
That the serial rate hikes by the Reserve Bank of India have considerably increased corporate Indias interest outgo was evident from figures released by the companies for the July-September quarter.

An FE study of 1,090 companies shows that they paid R14,968 crore as interest in the second quarter of this financial year, a 64.1% rise from the same quarter previous year. Banks and non-banking finance companies were excluded from the sample. The interest to sales ratio is increasing, indicating that sales is not keeping its pace with interest. Reserve Bank of India had increased interest rates 13 times since March 2010 in a bid to stem inflation.

Interest costs of companies collectively rise, whether on working capital finance or longer maturity loans, says Kislay Kanth, senior director, research at investment bank Mape Securities.

Some companies went to red as they paid double the interest they paid in fiscal 2011 second quarter.

Government-owned oil refiner Indian Oil paid R1,484 crore, more than double it paid in the same quarter previous year.

The company, reeling under the financial stress of selling fuel below its cost, reported R7,485 crore losses in the second quarter, pulled down by the interest paid.

Indias largest company by market value Reliance Industries paid R660 crore as interest and Bharti Airtel, Indias largest mobile telephony company by revenue and subscribers, paid R594 crore interest for the debt borrowed to purchase African mobile telephony Zain Kenya and buy third generation licence and later spend on 3G roll out.

The rate of growth in cumulative revenues was slower than the rate of growth in interest costs, says Kanth of Mape. Apart from rising input costs, financial cost also contribute to margin decline,he added.

The interest paid by Indian companies have been increasing in the fiscal second quarter.

Companies which paid R8,724 crore interest in financial year 2009 second quarter, had to pay more in next financial year same quarter at R9,122 crore. Companies paid R14,968 crore during July-Sept 2011 quarter.

Significant rise in sales insulate companies from their margins getting affected.

With RBIs consistent rate hikes, theres substantial pressure on Indian companies trying to make both ends meet, says Hiren Dhakan, associate fund manager, Bonanza Portfolio.

While they are strained by high input costs due to high inflation, the rise in borrowing costs is further worsening the problem.

Companies that make drugs, provide mobile services, transport goods and make fridges and television paid higher interest, while hotels and shipping paid less interest as they used internal accruals.

The aggregate sales of 1,090 companies increased by 19.6% to R5.46 lakh crore during July-Sept 2010 from R4.56 lakh crore in July-Sept 2009 and increased further by 20.1% to R6.56 lakh crore during July-Sept 2011. Net profit of these companies increased by 59.4% to R63,720 crore during July-Sept 2010 and decreased thereafter by 53.5% to R29,595 crore during July-Sept 2011.

So the profit margin increased from 8.75% to 11.66% during July-Sept 2010 and decreased thereafter to 4.51% during July-Sept 2011.

Therefore, the interest-to-sales ratio decreased from 1.91% to 1.67% during July-Sept 2010 and increase thereafter to 2.28% during July-Sept 2011. The latest interest rate hike by the RBI might hit corporates profit margin in the quarters to come.