Interest cost for India Inc has dropped: Crisil

Corporate profitability rises as a result

 
 According to a study done by Crisil, total interest expenses for 403 non-financial companies in the S&P CNX 500 index has dropped by 5 per cent in the March 2009 quarter, and by another 12 per cent in the June 2009 quarter, compared with the respective preceding quarters. This was driven by three factors: firstly, interest rates have eased even as working capital requirements reduced with the softening of commodity prices. Secondly, Indian companies’ borrowings in the global markets in June 2009 were the highest in any month since September 2008.

These borrowings are cheaper than rupee-denominated loans. And thirdly, the improvement in equity market valuations provided many companies an opportunity to raise funds in the form of institutional placements and preferential allotments
Said Crisil Rating’s Senior Director, Raman Uberoi, “Companies have benefited from the accommodative stance of monetary policy, an increased appetite for risk in international capital markets, and improved sentiment in the Indian equity market.”

Lower interest cost has led to higher profits for the 403 non-financial companies that form part of the S&P CNX 500 index.  These companies’ profitability had hit a low in the quarter of December 2008, following the July 2008 peak in commodity prices, and an increase in funding costs triggered by the 2008 credit squeeze. However, corporate profitability bounced back after January 2009 because of lower commodity prices and softer funding costs, it said.

Better credit quality

Crisil study also found that the pressure on Indian companies’ credit quality has eased a little in the current financial year, after reaching its peak in the second half of 2008-09. In the four months through July 2009, Crisil upgraded ratings on 13 entities and downgraded those on 90. In contrast, in the six months ended March 31, 2009, 81 ratings were downgraded and only one was upgraded. This indicates that although the pressure on credit quality continues, its intensity has abated.