High Interest Rates Fail To Scar India Inc’s H1 Show

Despite continued concerns of high interest rates, the latest financial results show that India Inc is emerging unscathed from its impact so far. For the half year ended September 2007, interest coverage ratio for Corporate India, excluding banking sector, has gone up from 10.8 to 11.7 times.

Interest coverage is broadly defined as operating profit to interest cost ratio. This means that operating profit generated by India Inc is more than 11 times its interest cost for the half year. It may also be noted that this ratio was only 8.5 times for half year ending September 2004.

The manufacturing sector, which has significant dependence on debt and is more vulnerable to interest rate movement, has improved its interest coverage from 10.1 to 10.8. However, on disaggregated basis, textiles and auto sector have seen a reversal.

While general buoyancy in demand in Indian economy contributes to this, lower input cost has provided the necessary advantage. For the half year, while sales rose by more than 13%, raw material cost rose by only 9%.

But not everyone is convinced. Says Amit Mitra, secretary general, Ficci: “It must be understood that interest payment is not the only expense item that a company has to meet. Besides interest payment, there are several other elements that contribute to the cost of production. The companies also have to reward their shareholders by way of dividend payments.

Moreover, the rising interest rates need to be seen in relation to the investment cost for the firms. An increase in interest rates has an impact on investment plans of companies. Whenever interest rates go up, some investment projects that were initially viable do not remain so and thus, such investments are held back.”

For H1 2008, while interest cost has gone up by 15.4%, operating profit has increased by about 25%. Operating profit has also been boosted by 45% increase in other income, partly coming from forex gain. However, even if we exclude this item from operating profit and then look at interest coverage, there is still a significant improvement from 9.2 to 9.6.

Among the sectors, cement has outperformed with maximum improvement in interest coverage. Textile and auto ancillary are the only sectors, which have suffered from steep hike in interest rate. Textiles, which was already operating at a low coverage ratio of 4.4, has seen it further drop to 3.4.

For auto sector, while the ratio has gone down, the sector is still operating at very high coverage and does not seem to be a cause for concern.