On The Mend

India Inc.’s interest-paying capability shows signs of improvement, but the companies may not be out of the woods yet.

- Niti Kiran

The economy is struggling to cope with fast-piling corporate debt but going by the Business Today analysis, India Inc’s debt-servicing capability has improved. Out of the BT 500 companies (ranked on their average market capitalisation between October 2016 and September 2017), we have excluded the banking, financial services and insurance firms and a total of 378 companies, whose comparable data is available, have been considered. As per our findings, the combined interest coverage ratio (ICR) for the sample companies improved to 5.2 times in FY2016/17 from 4.8 in 2015/16. It was 5 times in 2014/15 (see table Debt Cushion Gets Bigger).

ICR is a crucial yardstick that measures whether a company’s available earnings are adequate to pay interest charges on its outstanding debt. To calculate, a firm’s earnings before interest and tax or EBIT is divided by the interest charges for the same period. And the higher the ratio, the better the company’s safety margin. When a firm’s ICR deteriorates to 1.5 or lower, its ability to pay interests becomes doubtful. In the sample here, around 349 companies have an EBIT greater than their interest payments.

According to Kavita Chacko, Senior Economist at CARE Ratings, “With companies going slow on fresh borrowings and improvements in earnings, there has been an improvement in their debt-servicing ability. But their performance in the coming period, which is contingent on the underlying demand conditions in the economy, will determine whether it is a sustainable turnaround.” EBIT for the sample companies registered a double-digit growth of around 14 per cent in 2016/17 compared to 5.6 per cent in the previous financial year.