ICRA Expects Improved Credit Metrics For India Inc. In Q3
In the October-December quarter of 2023-2024, Investment Information and Credit Rating Agency (Icra) foresees a marginal sequential improvement in India Inc.'s credit metrics, expecting the interest coverage ratio to rise to 4.5-5 times in Q3 FY2024 from 4.5 times in Q2 FY2024. The interest coverage ratio, calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense, is anticipated to reflect improved performance due to enhanced earnings in Corporate India.
This improvement is attributed to continuing favourable factors such as moderating commodity prices and robust demand during the recent festive season. Icra's analysis of 601 listed companies in Q2 FY2024 revealed an anticipated improvement in operating profit margins, primarily driven by softened commodity prices. Despite recent declines, input costs remain elevated compared to historical levels.
The improvement in earnings, combined with the Reserve Bank of India's recent pause in rate hikes, contributed to a year-on-year increase in the interest coverage ratio to 4.5 times in Q2 FY2024, up from 3.9 times in Q2 FY2023 for Icra's sample set of companies. While the interest coverage ratio remained relatively flat sequentially, an anticipated earnings revival and the absence of rate hikes are expected to boost India Inc.'s interest coverage to 4.5-5.0 times in Q3 FY2024. However, long-term monitoring is required due to inflationary trends.
Despite expectations of support from the seasonally strong festive period, ICRA notes potential headwinds for India Inc. in Q3 FY2024, including uncertainties in the global economic environment, ongoing geopolitical developments, and the impact of food inflation on rural sentiment and related sectors. Navigating these challenges is crucial for India Inc., and as the base effect catches up, revenue growth momentum is projected to slow down, with estimated YoY revenue growth at 2-4% for Q3 FY2024 and H2 FY2024.
