India Inc's interest coverage ratio rises to a 3-year high on margin improvement , lower interest expenses
Synopsis Indian companies showed strong financial health. The interest coverage ratio reached a 12-quarter high in March 2025. This was due to better profit margins and lower interest costs. Operating margins improved because of cheaper raw materials. Earnings before interest and taxes grew faster than interest expenses. Corporate profitability and lending rates will influence future interest coverage. ET Intelligence Group: India Inc's interest coverage ratio hit a 12-quarter high of 5.8% at the aggregate level in the March 2025 quarter helped by margin improvement and lower interest expenses. It has shown improvement in two quarters in a row after hitting a low of 4.8% in the September 2024 quarter. The ratio, which is obtained by dividing operating profit (EBIT) by interest expense, reflects a company's ability to service outstanding debt; higher the ratio, the better it is. The data pertains to a common sample of 2,658 companies that have declared results for each of the past 13 quarters excluding banking and finance companies.
ADVERTISEMENT In March quarter, companies in select sectors reported improved profitability owing to benign raw material costs. The sample's operating margin rose by 110 bps year-on-year to 15.3%. "In Q4, operating margins improved, driven by a decline in input costs and easing inflation. Lower global crude prices and reduced raw material expenses supported profitability across several sectors," said Vinod Nair, research head, Geojit Investments. He said the trend enhanced operational efficiency, in manufacturing and consumption-linked industries.
The sample's EBIT grew at a faster rate year-on-year than interest outgo in each of the two quarters to March 2025. EBIT rose by 12.7% vs 6.8% increase in interest outgo for March quarter. "Many companies benefited from a moderation in input costs, with the most significant savings reported in raw material expenses," said Vinit Bolinjkar, head of research, Ventura, adding that relief in commodity prices played a crucial role.
Barring the September 2024 quarter, the sample's interest coverage ratio has remained above 5% in each of the quarters in the past two years. Interest outgo of corporates is likely to soften in the coming quarter given the reduction in lending rates in the economy. However, any improvement in interest coverage will also depend on trend in corporate profitability.
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