Sharp fall in interest rates and rise in revenues leads to a sharp improvement in interest coverage

 A sharp decline in interest rates and an increase in revenues led to a sharp improvement in interest coverage or the ability to service debt for most corporates in the July-September quarter. However the hospitality, retail and infrastructure sectors are still struggling to generate enough money to repay loans while real estate and telecom are on the border.

RBI’s repo rate cut to 4 per cent from 5.15 per cent post-lockdown had resulted in the weighted average lending rate on new loans falling to 8.29 per cent in September from 9.26 per cent in February. This is according to an analysis of 3,542 companies’ financials by CARE Ratings.

Interest coverage for these companies fell 2.6 times of the earnings in March 2020 from 4.3 in the last quarter. This ratio improved marginally to 2.7 in the June quarter before rising to 5.3 at the end September. An interest coverage ratio of below 1.5 is considered low, while a number below 1 indicates that a default is likely.

According to CARE Ratings, in the March quarter only seven out of 31 sectors saw an improvement in coverage ratio, while five sectors saw profits turn into losses resulting in negative interest coverage. The June quarter also saw five industries with negative interest cover — textiles, alcohol, gems & jewellery, telecom and hospitality. However, telecom sector’s losses were due to non-Covid reasons.

The September quarter saw enhancement across all sectors except
non-ferrous metals when it was seen that its interest coverage was at 4.9 times compared to 6.7 in the April-June period. At the end of the June quarter, retail and infrastructure sectors had interest coverage of below 1 while for telecom and real estate it was 1.4. The ratio for these sectors improved to 3 and above in the September quarter.

The Hospitality sector was the only one that continued to have a negative interest coverage at the end of the September quarter.