Not in shape to service debt

By: |
Mumbai | Updated: June 1, 2015 12:53:44 AM

Even as lower raw material prices provided some respite for India’s corporates last year, the interest coverage deteriorated...

Even as lower raw material prices provided some respite for India’s corporates last year, the interest coverage deteriorated, reports Devangi Gandhi in Mumbai. The aggregate interest cover for a sample of 96 non-financial companies that have reported their FY15 numbers declined by 42 basis points (bps) to 5.21 over FY14. Since FY08, the ratio has been coming off, which is not good news for bankers.

Interest cover is a measure that gauges a company’s ability to service the interest on its debt. It shows how easily a company can pay the interest from its operating earnings or EBIT (earnings before interest and taxes). The lower the ratio, the worse it is; a ratio of below 2 is considered to be poor.

In the last seven years, while firms in the power, infra, and real estate sectors have caused the interest cover to fall, in FY15, metal producers Jindal Steel, Tata Steel and Hindalco have also contributed to the drop. While the three metal companies reported 15%-74% decline in their EBIT in FY15, interest costs went up anywhere between 12% to 74%. The collective net debt of these companies stood at R1.54 lakh crore as of March 31, 2015, according to data on Bloomberg.

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Banks that have an exposure to the iron and steel sector could be in trouble. In late April Credit Suisse wrote that Indian banks’ high commodity exposure, particularly to metal sector is likely to add to their asset quality woes. Recently, Macquarie in a report titled “ Restructured Loans: A ticking time bomb? “ notes that the industry accounts for close to 20% of restructuring cases.

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