For a sample of 1,913 companies, the interest coverage ratio – or the number of times a firm can cover its existing interest costs with its available earnings calculated by dividing its profit before interest and tax (PBIT) with its interest expenses – has improved to around five times or higher since the December 2020 quarter
In a bid to cope up with a volatile demand environment affected by lockdowns and supply constraints, companies have improved their ability to service debt through cost rationalisation and reduction in long-term debt on books.
For a sample of 1,913 companies, the interest coverage ratio – or the number of times a firm can cover its existing interest costs with its available earnings calculated by dividing its profit before interest and tax (PBIT) with its interest expenses – has improved to around five times or higher since the December 2020 quarter compared with under four in the prior quarters. A higher ratio reflects improving ability to service debt.
Trend
The ratio improved to 4.9% in the June 2021 quarter from 1.8% in the year-ago quarter. It peaked at 5.4% in the March 2021 quarter and fell in the June quarter, reflecting the impact of rising input costs on PBIT.
Interest expense fell year-on-year in each of the four quarters to the June quarter as companies focused on reducing debt burden either through internal accruals or by raising fresh equity. PBIT on the other hand improved significantly during the period.
Profit
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Sectors including cement, chemicals, fertilisers, metals, oil and gas, and pharma reported improvement in the interest coverage ratio over the past few quarters. On the other hand, sectors such as automobiles, cap goods, construction, hospitality, logistics, media and entertainment, power, and retail did not show major improvement.
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