Business

Lower interest rates make India Inc less default prone

Read more at timesofindia.indiatimes.com

Mumbai: A sharp reduction in interest rates and an increase in revenues led to a sharp improvement in interest coverage or the ability to service debt for most corporates in the July-September quarter. However hospitality, retail and infrastructure sectors are still struggling to generate enough money to repay loans, while real estate and telecom are on the fence.
RBI’s repo rate cut to 4% from 5.15% post-lockdown had resulted in the weighted average lending rate on new loans falling to 8.29% in September from 9.26% in February, according to an analysis of 3,542 companies’ financials by CARE Ratings. Interest coverage for these companies had fallen to 2.6 times of earnings in March 2020 from 4.3 in the preceding quarter. This ratio improved marginally to 2.7 in the June quarter and jumped to 5.3 at the end September. An interest coverage ratio of below 1.5 is considered low, while a number below 1 indicates that a default is likely.
The September quarter saw improvement across all sectors except non-ferrous metals — its interest coverage was at 4.9 times compared to 6.7 in the April-June period. At the end of the June quarter, retail and infrastructure sectors had interest coverage of below 1, while for telecom and real estate it was 1.4. The ratio for these sectors improved to 3 and above in the September quarter. Hospitality was the only sector, which continued to have a negative interest coverage at the end of the September quarter.
According to CARE Ratings, in the March quarter, only seven out of 31 sectors saw an improvement in coverage ratio, while five sectors saw profits turn into losses resulting in a negative interest coverage. The June quarter also saw five industries with negative interest cover — textiles, alcohol, gems & jewellery, telecom and hospitality. However, telecom sector’s losses were due to non-Covid reasons.
A negative interest cover meant that the company is making losses in its earnings before interest, tax, depreciation and amortisation (ebitda), said Madan Sabnavis, chief economist, CARE Ratings.
The last week of a financial year is typically the biggest in terms of sales. As a result, the lockdown, which began in the last week of March, had brought down earnings for the entire quarter. The April-June quarter was hit the most as it saw the maximum period under a strict lockdown.

Read more at timesofindia.indiatimes.com

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