Major public sector companies? interest burden increased drastically in the year 2011-12 owing to factors like high interest rates, soaring crude oil prices and economic slowdown.
An FE study shows that interest coverage ratio of 54 PSUs (excluding banks and financial institutions) fell to 7.6 in 2011-12 from 10.4 in the preceding year.
Interest coverage ratio is equal to earnings before interest and taxes (Ebit) divided by interest expenses. It shows a company’s ability to pay its interest charges on time. The ratio tells how many times the interest could be paid from earnings. The lower the interest coverage ratio, the worse off a company is. Usually, a ratio of 1.5 provides some comfort level.
Oil marketing companies like IOCL, BPCL and HPCL saw a drastic decline in their ability to service debt as their under-recoveries shot up, forcing them to borrow heavily from the market.
In the last five years, PSUs debt burden was higher only in 2008-09, largely on the global financial meltdown post-Lehman Brothers collapse in September 2008.
PSUs interest servicing coverage ratio remained between 10-12 during the following three years when the market condition was more or less normal.
