Credit metrics of India Inc. to improve in Oct-Dec quarter: ICRA

ICRA expects the credit metrics of India Inc. to show slight sequential improvement in October-December quarter 2023-2024, with the interest coverage ratio increasing to 4.5-5.0 times in Q3 FY2024 from 4.5 times in Q2 FY2024.

The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense during a given period.

The credit metrics would result from improved earnings of Corporate India, on the back of continuing, albeit moderating tailwinds from commodity prices and seasonally strong demand during the recently concluded festive season, the credit rating agency said.

ICRA’s analysis of the Q2 FY2024 performance of 601 listed companies (excluding financial sector entities) revealed expectedly improved operating profit margins, increasing by 398 bps and 64 bps on a year-on-year and sequential basis, respectively. This was primarily aided by softening in commodity prices. However, while the input costs softened in recent months, they remain elevated compared to the historic levels.

Improvement in earnings coupled with a pause in rate hikes by the RBI in the recent past (thereby restricting the upward movement in finance cost), led to YoY improvement in interest coverage ratio to 4.5 times for Q2 FY2024 from 3.9 times in Q2 FY2023 for ICRA’s sample set companies.

However, it remained flattish on a sequential basis. An expected revival in earnings coupled with pause on rate hike is likely to result in an improvement in India Inc’s interest coverage to 4.5-5.0 times in Q3 FY2024, although inflationary trends remain a monitorable in the long run.

“While India Inc’s performance in Q3 FY2024 is expected to be supported by the seasonally strong festive period, the uncertainties in the global economic environment, ongoing geo-political developments, and the impact of ongoing food inflation on rural sentiment and related sectors are potential headwinds,” said Kinjal Shah, Vice President & Co-Group Head – Corporate Ratings, ICRA Limited.

“Accordingly, the ability of India Inc. to navigate these challenges remains critical. Furthermore, as the base effect catches up, the revenue growth momentum is likely to slow down, with YoY revenue growth estimated at 2-4 per cent for Q3 FY2024 as well as H2 FY2024.”