Bangalore: India Inc’s interest paying ability has trim down to a five year low, revealed by a study conducted by CRISIL (Credit Rating and Information Services of India). The main reason for this slow revenue growth is high interest rates and decline in operating profits. CRISIL says the interest coverage rate ratio will lead to the downfall of overall growth expectations. The study was conducted among 420 companies, excluding the banking, financial services and insurance and public sector oil marketing companies.

It says that the Median Interest Coverage Ratio has fallen to 4.8 times in July-September 2011 quarter against 7.8 times in July-September 2010, for the past 5 years, the average Interest Coverage Ratio for these companies was 8.4 times. Though the Interest Rate Cycle is gradually proceeding towards the apex, the Interest Coverage Ratio will remain under pressure for next few quarters as corporate sales could be slowed down because of lower GDP growth. The median debt-equity ratio has significantly fallen over the past two years.

Reserve Bank of India (RBI) has increased rates to cut down inflation. Due to this the companies’ interest cost rose by 36 percent in July-September 2011. Profit margin is pushed by the rising input costs, though increase in sales somewhat moderated the impact. Roopa Kudwa, Managing Director and CEO of CRISIL said, “While interest coverage is still healthy at 4.8 times, the magnitude of drop over the past few quarters is high. Economic uncertainty in the western economies combined with lower GDP growth expectations at home could potentially push Indian Companies into a slower revenue growth phase. This could increase the pressure on profit growth and result in further deterioration of interest coverage ratio.”

According to Tarun Bhatia, Director, Capital Markets, CRISIL Research, “On a sectoral basis, FMCG, information technology and pharmaceuticals have low gearing and fare best on the basis of interest coverage metrics. Our study reveals that stocks in these sectors have outperformed the S & P CNX 500 Index by an average 23 percent over the past one year. On the other hand, companies with low interest coverage ratio, in sectors like infrastructure and real estate have underperformed the index by an average 20 percent over the past one year."