The interest coverage ratio for about 50 public sector undertakings (excluding banks and NBFCs) increased to 9.66 in 2009-10 from 5.71 the year before. The higher the ratio, the lower is the risk of default on debt by a company.
The interest coverage ratio is used to determine how easily a company can pay interest expenses on its outstanding debt. The ratio is calculated by dividing a company?s earnings before interest and taxes (Ebit) by its interest expenses for a period.
The ?coverage? aspect of the ratio indicates how many times the interest could be paid from available earnings, thereby providing a sense of the safety margin a company has for paying its interest for any period.
A PSU that sustains earnings well above its interest requirements is in an excellent position to weather possible financial storms. By contrast, a PSU that barely manages to cover its interest costs may easily fall into financial difficulties if its earnings suffer for even a single quarter.
The lower the ratio, the more the company is burdened by debt expense. When a company?s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.
The aggregated profits (Ebit) of 50 PSUs increased by 12.8% to Rs 1.04 lakh crore during 2009-10 from the level of Rs 92,324 crore during 2008-09. The total interest expenses of these companies fell 33.2% to Rs 10,781 crore during 2009-10 from the level of Rs 16,155 crore during 2008-09.This helped PSUs to increase their interest coverage ratio in 2009-10.
The top five PSUs according to the interest coverage ratio in 2009-10 were Bharat Electronics, Oil India, Dredging Corpn of India, National Aluminium Company and Engineers India.
A significant increase in the ratio was witnessed in IOC, NHPC, GAIL, ONGC, RCF, NFL, OIL, HCL, and BEL.
IOC posted Ebit of Rs 15,632 crore against Rs 8,281 crore in 2008-09, registering an increase of 88.7%. At the same time, its interest expense decreased by 61.4% during the year.
In the case of RCF, though its Ebit decreased by 9.2% to Rs 364 crore during 2009-10 from Rs 401 crore, its interest outgo fell steeply by 73.5% during the year. The company?s loan funds decreased by 6.5% to Rs 1,331 crore and the debt-equity ratio to 0.72 from 0.85.
A significant fall in interest cover was observed for SAIL, Petronet LNG, FACT, SCI, BEML and Neyveli Lignite.
The interest outgo of SAIL increased by 55.2% to Rs 402 crore during 2009-10, though its Ebit went up from Rs 9,658 crore to Rs 10,534 crore.
In the case of Petronet LNG, its Ebit fell by 10.5% to Rs 783 crore when its interest outgo climbed up 81.7%. Its loan fund rose 0.8% to Rs 2,299 crore during 2009-10 while its debt-equity ratio decreased from 1.15 to 1.03.
Out of 50 PSUs, only three, namely FACT, Madras Fertilisers and TN Telecom, had an interest coverage ratio below 1.5 during 2009-10.