Indian Companies Remain Stressed But Ability To Service Debt Improves

Corporate balancesheets in India remains stressed but the ability of companies to pay interest on loans improved slightly in the quarter ended September.

According to Credit Suisse's Corporate Health Tracker report dated November 17 , the share of debt held by companies with interest coverage ratio of less than one was at 40 percent of the total debt, down 2 percentage points from the previous quarter, the report added.

Interest coverage, the ratio of operating profit to interest expenses, is used to determine how easily a company can service interest payments on outstanding debt. A ratio of one or more means that the company will cover its cost of debt for the year.

This improvement was largely on the account of Tata Motors' exit from the list, as the share of “chronically stressed debt” has increased 100 basis points to around 38 percent, the report said.

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Weak corporate credit quality has been a key reason for the build-up of bad loans in the Indian banking system with gross non-performing assets rising to Rs 8.4 lakh crore as of September 30. The Reserve Bank of India has identified 30-40 more defaulting companies for insolvency action in its second list, over and above the 12 cases it identified in June.

While the quantum of stressed debt remains high, the ability to service debt has improved marginally.

The aggregate interest cover of companies covered by Credit Suisse improved to 2.4 from 2.2 sequentially.

Much of the stressed corporate debt in India was concentrated in infrastructure, metal, power and telecom companies.

• Power debt with interest cover less than one is now 43 percent of the total. This has improved from 64 percent just six months ago. However, even as the overall share of chronic debt has declined the performance of weaker companies remains subdued with weak operating performance, Credit Suisse said.
• In the telecom sector, the share of chronic debt rose to around 60 percent as profitability falls across companies. Overall interest cover for the sector too has declined to 0.2 from 1.2 in the same quarter last year.
• Steel companies have seen an improvement in profitability but not debt levels. Chronic debt share remains elevated at 55 percent of the total, while half of the sector's debt is with companies whose borrowings are over 12 times their operating incomes, the report showed.

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This story has been edited to correct factual errors.