Buzz Update The interest rate hike may have an impact on FY23 India Inc. earnings TOU

Buzz Update The interest rate hike may have an impact on FY23 India Inc. earnings


The interest rate hike may have an impact on FY23 India Inc. earnings

Prices of upright raw material are already hurting India Inc. Leading by that, the Reserve Bank of India signaled that interest rate hikes were coming.

Economists expect the first hike in June. Surprisingly, analysts polled in Bloomberg cut their FY23 June quarterly earnings (EPS) expectations for the Nifty 50 companies by 8.9%.

Can India Inc. double the belly? Almost.

According to an analysis of the Nifty 500 universe, nearly 52 per cent of companies, or 218 out of 415 (excluding banks and financial services), have had their interest coverage ratio plummeted over the past four years – to 4.5 per cent in March 2020, the lowest level ever from the 2018 highs.

The decline in interest coverage was particularly acute in sectors such as automobiles, consumer discretion, hotels, chemicals and real estate, while it improved in sectors such as cement, steel, tires, power and fertilizers.

In the case of companies like Tata Motors, Aditya Birla Fashion and Indian Hotels, the interest coverage ratio will fall into the negative zone in the December 2022 quarter (Q3 FY22).

To put things in context, the interest coverage ratio refers to the ability of a company to pay interest on loans. A higher ratio means the company is financially healthy to repay the loan.

If the number is gradually decreasing, it indicates financial pain. A negative ratio indicates that the company is not getting enough operating profits to meet its financial obligations.

Risk to FY23 earnings

Revenue growth in FY21 was largely driven by cost controls, including lower interest rates.

For the Nifty 500 stocks, despite a 7 per cent year-on-year decline, net profit in FY21 rose by 56 per cent year-on-year on the back of several cost-cutting measures taken by India Inc. and plenty of support from the RBI. In the form of a low repo rate.

As banks passed on the cost benefit to borrowers, companies used it to repay loans.

In FY22, despite a 40 per cent increase in operating expenses, strong interest rates and strong growth in revenues after the Kovid recession boosted net profit for the Nifty 500 companies over the nine months ended December 2021.

In fact, the debt-to-equity ratio – which is a measure of leverage – fell from 1x in FY18 to 0.55x for the half year ending September 2021.

Despite these tailwinds, at least half the Nifty 500 companies have seen a decline in the interest coverage ratio since FY18.

Things are changing once again as input costs rise faster than expected due to the Ukraine conflict.

Despite the FY23 EPS downgrade of 8.9% in the June quarter, full-year expectations for the Nifty 50 earnings – at around ₹ 823 per share – are almost intact and one can expect to pick-up faster than expected. -Increase in revenue.

However, if interest costs spoil the game, earnings across the board may not be hurt.


April 16, 2022

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