An increasing number of Indian companies are finding themselves in a debt trap, with their gross profits not sufficient to cover their interest payments.
Of the 600 listed companies (excluding banks and finance companies) that had interest obligations in 2012-13, 85 were unable to meet their interest expenses out of their gross profits (profits before interest, depreciation and tax).
The number of companies in this situation shot up by 40 per cent (from 61 companies) last fiscal. What is more, it is more than double the 32 firms that were saddled with onerous debt prior to the global economic crisis of 2008. These companies featured an interest cover ratio of 1 or less.
An interest cover ratio is the number of times gross profits cover interest obligations. A ratio of 6 or more is deemed comfortable.
So, which sectors did these companies hail from? Surprisingly, 16 of them were mid or small-size technology companies — 3i Infotech, Moser-Baer, Zenith Infotech and Ramco Systems. Four construction companies, including Hindustan Construction and SAAG RR Infra, also fell into this category, in terms of their interest coverage ratio. Companies that are unable to service their debt with their yearly profits are likely to borrow more money to make interest payments. While this would help them make the payouts in the short-term, their burden is compounded over the longer term unless they are able to significantly boost revenues and profits to repay new loans. This was a strategy adopted by beleaguered airline Kingfisher and wind turbine-maker Suzlon Energy.
Besides these firms, pharmaceutical outfits such as Panacea Biotec and Fulford (India); capital goods makers such as Suzlon Energy and BEML; textiles players such as KSL and Industries and Prime Urban; and power generation and distribution companies such as Entegra and BF Utilities also figured in the list of listed firms with an interest coverage ratio less than 1. There has also been an increase in the number of companies in danger of slipping into a debt trap, where the interest coverage ratio is below 1.5 but above 1. As of March 31, 2013, a total of 43 companies fell into this “at risk” category, compared to 36 last year.
Among the companies that fell into this category in 2012-13 were Piramal Enterprises, GVK Power Infra, Lanco Infratech and Parsvnath Developers.
Other firms with an interest coverage ratio of 1-1.5, based on their consolidated numbers, include JSW Ispat, Shree Renuka Sugars, Jyothy Lab, United Spirits, HDIL and Sesa Goa.