India Inc to continue facing interest-payment pressure:CRISIL

Though the interest rate cycle has largely peaked in India, the interest coverage ratio of corporates, which have dipped to a five-year low, will remain under pressure over the next few quarters, a study by CRISIL Research reveals.

High interest rates and a decline in operating profits have resulted in the interest paying ability of companies in the S&P CNX 500 Index (excluding banking, financial services, insurance and public sector oil marketing companies) to dip to a five-year low.

The interest paying ability of a company is measured through interest coverage ratio, calculated as earnings before interest and taxes (EBIT) / interest. The study by CRISIL Research, India's largest independent and integrated research house, reveals the median interest coverage ratio has fallen to 4.8 times in the July-September 2011 quarter against 7.8 times in the same quarter of the previous fiscal.

The average interest coverage ratio for these companies in the past five years was 8.4 times. But the median debt-equity ratio (gearing) has declined marginally over the past two years.

Though the 4.8 times interest coverage is still healthy, the magnitude of drop over the past two quarters is high. This has led to higher risk aversion towards capital spends – which is reflected by the 25.5 per cent drop in capital goods investments.

During the past one year, stocks in sectors like FMCG (fast moving consumer goods), information technology and pharmaceuticals, that have low gearing and fare best on the basis of interest coverage metrics, have outperformed the S&P CNX 500 Index by an average 23 per cent, the study points out.