Falling operating profits and a rising interest bill could make it harder for mid-sized and smaller companies to service their loans. In the September quarter, the operating profits for a set of 82 mid-cap firms dropped to Rs 46,668 crore from Rs 53,931 crore in the June quarter. At the same time, the interest bill went up. This has driven down the interest coverage ratio (ICR) to 2.62 from 4.13 at the end of March, though the ratio is much better than the pre-Covid level of 1.92 in December 2019.

The story is similar for smaller firms where, for a set of 662 entities, the operating profit declined to Rs 79,639 crore from Rs 90,913 crore in the June quarter, while the interest expenses have risen. That has sent the ICR down to 2.69 at the end of September from 3.42 in March. Again, this is better than the 2.09 in December 2019.

The ICR is an indication of the ability of a company to service the interest on its books.
In 2022 so far, the BSE SmallCap index has lost 2%, the BSE MidCap index is up 1.1%, while the BSE 500 has gained 4.4%.

Among the firms where the ICR ratio has fallen are Suzlon, Tata Metaliks, Birlasoft, Hathaway, Indigo paints, CarTrade Tech, Rallis India and Tata Coffee.

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Bigger companies include Amber Enterprises, Sunteck Realty, Strides Pharma, Tata Power, Adani Green, Adani Transmission, Adani Power, Dalmia Bharat and Sterlite Tech.

In general, the Q2FY23 performance of India Inc has been disappointing with net profits falling year-on-year. While revenues have grown fairly well in an inflationary environment, a sharp increase in raw material costs has crimped operating profit margins, pushing down operating profits. The second half of the year could see companies reporting better operating profits as commodity prices ease.

However, interest rates are expected to stay elevated in the forseeable future even if they rise at a slower pace from here on. While inflation has no doubt eased, analysts caution there are upside risks from higher domestic food and fuel prices.

Moreover, the economy is expected to grow at a slower rate of just around 5% in FY23 on the back of 6.6-6.8% growth in FY23. The slower growth could see corporate earnings rising at a slower pace, especially for smaller companies.

The sample excludes banks, financial services and insurance (BFSI), and oil and gas companies.