Cos yet to benefit from rate cuts

Cos yet to benefit from rate cuts

Aarati Krishnan

The aggressive interest rate cuts unleashed by the RBI since October are yet to bring down interest costs for India Inc. Total interest costs for leading Indian companies increased 90 per cent in the December quarter compared with the same period last year.

Interest costs also expanded by 12.5 per cent sequentially (relative to the September quarter). Interest charges absorbed nearly a fifth of the quarter’s operating profits.

The above analysis is for 302 leading companies from the BSE 500 basket that have so far declared their December numbers. Banks were excluded for a realistic picture.

These companies paid a total of Rs 12,730 crore as interest charges during October-December 2008, up from Rs 6,713 crore in the corresponding quarter of 2007. Apart from rising interest rates, higher working capital requirements, ongoing capital investments and higher levels of leverage, explain the spike in financing costs.

Apart from a rise in the absolute outgo, interest charges also took away a larger proportion of the operating profits for these companies. In the latest quarter, interest costs accounted for 18.5 per cent of operating profits and 3 per cent of net sales. The numbers were much lower, at 1.7 per cent of sales and 8 per cent of operating profits, last year.

Though companies have managed to expand their sales (11 per cent growth) over the last one year, rising raw material and energy costs have sharply whittled down profit margins.

Operating profits for the 302 companies in the latest December quarter were 17 per cent lower than a year ago. Lower margins magnified the impact of higher interest cost on the net profits, which declined.

Rising finance costs have also cut down the margin of comfort that companies enjoyed in servicing their debt burden. The interest cover (the number of times the profits before interest and taxes covers interest charges) for the 302 companies fell from a fairly comfortable 10 times in end-2007 to four times by end-2008.

However, there was a wide divergence in interest incidence between companies and sectors. While as many as 114 companies carried a precarious interest cover of two times or less, 108 still enjoyed a comfortable cover of over six times.

Of the sectors represented in the BSE 500, oil refineries (interest costs rose over two-fold), engineering (doubled), fertilisers (up 73 per cent) and infrastructure (up 61 per cent) witnessed the sharpest year-on-year increases in interest costs this quarter.

https://www.thehindubusinessline.com/2009/02/02/stories/2009020251380100.htm