Nifty companies’ ability to service debt comes under pressure

The economic slowdown aggravated by the nationwide lockdown has severely affected the ability of companies to service debt. According to the ET Intelligence Group’s analysis of the 32 of the Nifty 50 companies that have declared results so far excluding banking and finance companies, the aggregate interest coverage ratio for FY20 fell to a six year low of three after staying between four and six since FY15. The trend is expected to continue in the current fiscal given the expectations of contraction in the economic activities.The interest coverage ratio is calculated by dividing EBIT with the interest payment in a given period. A higher ratio is desirable since it implies a better ability to service the debt and also a greater comfort in borrowing more in the future.The fall was steeper on a quarterly basis. The ratio was at a 13-quarter low of 1.8 in the March 2020 quarter. It was at 3.9 a quarter ago. The contraction was on account of a steady rise in borrowings, which kept the interest payments buoyant despite falling lending rates in the economy, and a sharp drop in the operating profit (EBIT) during the quarter as companies went into a lockdown beginning from the last week of March to contain the COVID-19 spread. The interest expense of the sample increased by 15.6% while EBIT dropped by 52% year-on-year in the March 2020 quarter. Total net debt of the sample increased by 87% to Rs 24.5 lakh crore between FY15 and FY20 according to the data from Capitaline. The growth in revenue and profit before depreciation and amortisation (EBITDA) was slower at 38% and 36% to Rs 27.5 lakh crore and Rs 3.3 lakh crore respectively.

from Economic Times https://ift.tt/3fW9WG5
via IFTTT