India Inc improves interest coverage in Q1 amid strong operating profit, lower interest expense

The aggregate interest coverage ratio for India Inc hit a nine-quarter high in the recently concluded quarterly results season following a sustained double-digit growth in the operating profit and deceleration in the interest expense. The ratio was 4.9% in the June quarter for a sample of 2,695 companies excluding banks, finance companies, and oil and gas companies compared with 4.5% in the year-ago quarter.

The ratio is calculated by dividing earnings before interest and tax (EBIT) by interest expense in the given period. It indicates the ease with which a company can service debt obligations. Higher the ratio, better the numbers.

The sample’s EBIT increased by 13.6% year-on-year during the June quarter, marking it to be the fifth consecutive quarter of double-digit growth. The interest expense increased by 3% during the quarter from the year ago. It was the lowest rate of increase in nine quarters. It has been decelerating gradually since the December 2022 quarter when it had peaked at 21.6%, pulling down the interest coverage ratio to 4%.

The sample’s profit growth has been supported by a stable trend in raw material costs. As a percentage of revenue, raw material costs have hovered between a tight range of 30% and 31% over the past five quarters. It was 30.5% in the June 2024 quarter, which was similar to the year-ago level. During the quarter, the sample’s aggregate revenue grew at a five-quarter high rate of 7.6%. Net profit rose by 22.3%, a fifth quarter of double-digit growth.