CALL IT THE DELEVERAGING effect or better cost management, India Inc. seems to be in a better position in terms of interest coverage ratio (ICR). But as expected, the ICR, a key metric that indicates a company’s ability to service its debt by dividing profit before interest and tax (PBIT) by the interest expense, shows varying degrees of resilience across sectors.

In Q4 FY24, the ICR for the non-BFSI sector (2,259 companies) improved to 5.89x from 5.5x in Q4 FY23. The improvement came despite higher interest rates, indicating that many companies have managed to enhance profitability, thereby improving debt servicing capabilities. Aditi Gupta, economist at Bank of Baroda, believes stable global commodity prices and strategic management of expenditures significantly contributed to the improved coverage ratios across sectors. Expenses growth at 7.5%, coupled with lower interest costs and stable commodity prices — which had previously been elevated and contributed to lower input costs — played an important role in improving profit margins.

Healthcare, gas transmission, and industrial gases & fuels saw improvement in their ICRs, reflecting robust profit growth owing to increased demand and stable input prices. The automobile and ancillaries sector also showed strong demand, contributing to higher profitability and an improved ICR. Conversely, telecom, non-ferrous metals, FMCG, and electricals saw ICR declines with telecom hitting a low at 0.71x. “Telecom numbers are skewed largely because of Vodafone Idea,” says Gupta. Including accrued interest, Vi’s gross debt stands at ₹2.03 lakh crore.

But what’s notable is that of the 33 sectors, only 12 showed a decline in ICR. “This indicates that most sectors have managed to offset higher interest costs through improved profitability,” says Gupta. The top three highly indebted sectors, power, telecom, and crude oil, saw some improvement in their ICRs compared to Q4 FY23. However, the telecom sector’s ICR is still less than ideal, while crude energy and power sectors’ ICR lag their Q4 FY22 levels.

lower leverage

The Brief: Why India Inc. Is Better Placed On Debt