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Interest payments vs India Inc. - Views on News from Equitymaster
 
 
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  • May 27, 2003

    Interest payments vs India Inc.

    Interest rates have played a very important role in FY03 for India Inc. by providing a boost to their bottomlines. Infact, for some companies, it can rightly be said that interest rates have saved the day for them. For without a considerable reduction in interest outgo, certain companies may have had to face a difficult time protecting their profits. This argument is particularly apt in times of weak economic growth, which India is facing currently.

    Note: Interest is 9mFY03 annualised for FY03.

    The graph above clearly shows the intentions of the government and what its policies are directed at. A soft interest regime is what has been on the government’s mind. The situation has been similar all over the world. India Inc. has immensely benefited by the prevalence of lower interest rates. Companies took advantage of this and re-jigged (some even prepaid) their debts, replacing high cost debts with relatively lower interest bearing instruments. This led to a reduction in their interest outgo, which helped companies post better bottomline growth.

    Note: Net sales are 9mFY03 annualised for FY03.

    As can be seen in graph I (Interest payments vs BSE-30), interest payments as a percentage of net sales has been on a continuous declining trend for the BSE-30 group. It fell from 14.2% in FY95 (14.7% in FY99) to 12.9% in FY02. However, in FY03, there was a sharp rise in this figure (15.6%) owing to a negative sales growth of 0.8% (refer graph BSE-30 : Net sales growth). This has skewed the picture to a certain extent. Poor monsoons last year and weak global economic growth has affected the topline growth of these companies. But all the same, reduction in interest burden saved bottomline growth to an extent, despite sluggish topline.

    Going forward, companies are likely to continue to benefit from lower interest outgo and in wake of normal monsoons, a strong topline growth could once again change the situation for the better. As far as the interest rates are concerned, RBI has stated that it does not see much room for further reduction in interest rates. Hence, from hereon not just interest rates, but the companies’ internal efficiencies will also play a key role in enhancing performance.

     

     

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