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In response to the falling interest rate cycle, the interest coverage ratio of companies has improved in FY21 following a 40bps drop in the repo (plus 75 bps in March 2020) and a 79bps drop in weighted average lending rate (WALR), said the Bank of Baroda in a report.
The report said that in FY22 as well, interest cover of companies continued to show significant improvement to 5.76 from 4.56 in FY21.
Notably, in FY22, despite moderation in operating margin (Operating profit/Net sales), interest coverage of companies improved, clearly reinforcing the view that RBI’s accommodative policy supported this trend, it added.
Industry-wise, aviation, consumer durables and hospitality are still facing considerable risk, post-Covid-19 induced slowdown. However, few infra sectors such as capital goods, iron and steel and construction have better interest coverage ratio.
“Micro, small and medium enterprises still have interest coverage below 1, large enterprises have comparatively better financial health,” it mentioned.
Interest payment has fallen in line with the falling rate cycle
The study revealed that in the past 5 years, the operating profit of companies has grown at a compound annual growth rate of 8.4 per cent while interest has increased by 4.8 per cent.
“The 5-year average of interest cover of companies has been 4.8. However, excluding industries such as FMCG, industry gas and fuels, IT and mining which inherently have a higher interest coverage ratio, the 5 year average of interest cover turns out to be 4,” it said.
From FY20 onwards, in response to the falling policy rate (115bps cumulatively in FY20-22), interest coverage of India Inc. has improved significantly. From 4.04 in FY20, it has improved to 5.76 in FY22.
Notably, the interest of companies on average has declined by 2.2 per cent in the past two years of the favourable rate cycle. The weighted average lending rate has also fallen by 90bps
Industries that are not faring well, it added, the high-risk ones with an interest coverage ratio below 1 are aviation, consumer durables and hospitality.
“These sectors especially are bearing the brunt of Covid-induced slowdown. Few infra segments such as capital goods, iron and steel, construction as well as automobile and ancillaries have been performing well, it mentioned.
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