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Vidya Bala

Corporate results for the quarter ended June 2008 suggest that India Inc may now have lower cushion on profits to cover interest obligations.

An analysis of the performance of over 1500 companies reveals that their ‘interest cover’ (the number of times profits cover interest costs) hovered at a discomfiting 2.2 times for the June 2008 quarter, down from 2.8 times last year.

Interest costs now account for a 40 per cent of the profits before interest and taxes for these companies, in contrast to around 35 per cent in the June 2007 quarter.

The low interest cover presents a challenge for companies at a time when banks are effecting further increases in their lending rates from current levels, which may further increase the interest outgo.

Slower profit growth was part of the reason for the declining interest cover.

Though India Inc managed a robust 36 per cent growth in net sales for the June 2008 quarter, growth at the operating profit level was muted at 20 per cent. Profits grew at a healthier rate of 33 per cent in the same period last year.

Net profits, adjusted for extraordinary items, witnessed an even sharper slowdown in growth (refer table).

A spike in raw material costs, mark-to-market losses recognised by a number of companies on their foreign exchange transactions/loans and burgeoning interest costs trimmed profit growth.

The growth in sales is however, indicative that demand continues to be strong, contradicting the slowdown suggested by the industrial production numbers.

The other disturbing facet of these results is the liberal dashes of red in the results, with the number of loss-making companies as well as the quantum of losses swelling.

The number of loss-making companies at the net level in the June 2008 quarter, increased to 249 from 220 a year earlier.

Total losses notched up by these companies expanded two-fold from Rs 1,082 crore to Rs 2,390 crore this June quarter.

These numbers exclude the losses posted by oil marketing companies (at Rs 1,954 crore).

Apart from input price increases, forex losses and provisions for the same were also among key reasons for the reported numbers slipping into the red this quarter.

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