In the October–December quarter of 2023–2024, ICRA anticipates that India Inc.’s credit metrics would show a minor sequential improvement. The interest coverage ratio is expected to increase from 4.5 times in Q2 FY2024 to 4.5–5.0 times in Q3 FY2024.
A company’s earnings before interest and taxes (EBIT) is divided by its interest expenditure for a certain time period to get the interest coverage ratio.
According to the credit rating agency, the credit metrics would be the consequence of stronger Corporate India profitability, which would be the outcome of ongoing, but decreasing tailwinds from commodities prices and seasonally robust demand over the just ended Christmas season.
The operational profit margins of 601 listed businesses (excluding banking sector organizations) increased by 398 bps and 64 bps on a year-over-year and sequential basis, respectively, in Q2 FY2024, as projected by ICRA. The weakening of commodity prices was the main factor in this. Though they have decreased recently, input prices are still high when compared to historical levels.
A recent delay in rate rises by the RBI, along with improved profitability, limited the increase in financing costs. As a result, the interest coverage ratio for the firms in ICRA’s sample set improved year over year, from 3.9 times in Q2 FY2023 to 4.5 times in Q2 FY2024.
Still, it stayed rather flat sequentially. India Inc.’s interest coverage is anticipated to increase to 4.5–5.0 times in Q3 FY2024 as a consequence of anticipated profits growth and a halt to rate hikes; nevertheless, long-term inflationary tendencies should still be closely watched.
Kinjal Shah, Vice President & Co-Group Head – Corporate Ratings, ICRA Limited, stated, “While the seasonally strong festive period is expected to support India Inc’s performance in Q3 FY2024, 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.”
Consequently, India Inc.’s capacity to overcome these obstacles is still vital. Furthermore, the revenue growth pace is expected to slow down as the base effect catches up; YoY revenue growth for Q3 FY2024 and H2 FY2024 is projected to be between 2-4 percent.