Debt repayment ability of mfg cos fell in Q3 on weaker earnings, shows RBI data

Data released by the Reserve Bank of India (RBI) showed that the interest coverage ratio (ICR) of manufacturing companies declined to 7.6 in the December quarter, down 30 basis points (bps) from the previous quarter. Interest coverage ratio is the ratio of earnings before interest and tax to interest expenses, a measure of the debt servicing capacity of a company.

The fall in Ebitda, or earnings before interest, taxes, depreciation, and amortization, for listed manufacturing companies, excluding those owned by the government, was steeper than the pace at which interest cost fell in the same period. While Ebitda fell 4.8% sequentially in the December quarter, interest cost for the quarter was down 3.3%, as per the data cited earlier. The aggregate Ebitda stood at ₹1.8 trillion for these manufacturing companies, whereas the total interest outgo was ₹18,964 crore.

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“Some sectors like fast-moving consumer goods (FMCG), textiles and fertilisers witnessed a QoQ decline in operating profits in Q3 FY2025, which, in turn, impacted the interest cover," said Sakshi Suneja, vice-president and sector head of corporate ratings, Icra.

Suneja said that the decline in operating profits was driven by factors like inflationary pressures and muted urban consumption, which impacted demand for sectors like FMCG. Rising input costs also impacted profits in industries like textiles, impacting the ICR.

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When split across scale, the stress was concentrated amongst smaller companies with annual turnover of less than ₹50 crore, as per an analysis of 3,000 listed companies by India Ratings. Almost one out of every three such smaller companies has an ICR of less than 1. This compares to less than one out of 10 large companies with an annual revenue of ₹500 crore or more and an ICR of less than 1. One in five mid-sized companies had an ICR of less than 1.

“There are pockets of stress lingering on small-scale cement players, road EPC players and metals and mining companies," said Prashant Tarwadi, director India Ratings & Research.

The RBI data considers financial numbers for 1,675 listed private manufacturing companies. These reported a 7.7% growth in sales in Q3, as against 3.3% during the previous quarter, and RBI said it was mainly driven by higher sales growth in automobiles, chemicals, food products and electrical machinery industries.

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Icra expects finance costs for companies to moderate, considering the recent 25 bps repo rate cut announced in February. The RBI's monetary policy committee lowered the repo rate by 25 bps in its first cut in five years, over expectations of benign inflation and hoping to prop up economic growth.

“Further, improved earnings will mean lower reliance on debt, thus overall supporting the finance expenses for the companies," said Suneja.

Meanwhile, corporate earnings have been weak in the December quarter. According to Motilal Oswal Financial Services, India Inc. is approaching 2025 with caution, balancing growth aspirations with economic realities. It said that while public investments and domestic consumption support growth, global slowdown, supply chain disruptions, and inflationary pressures remain key concerns.

“Corporate profitability is under strain, with Nifty-50’s FY25 earnings growth projected at just 5% y-o-y, a sharp drop from the over 20% CAGR (compounded annual growth rate) recorded between FY20-24," it said in a note on Monday.

Others pointed out that the lower profitability of manufacturing companies in Q3 (compared to Q2) is a probable reason for a dip in the interest coverage ratio. An economist who spoke on condition of anonymity said that banks did raise their marginal cost of funds-based interest rates (MCLR) last year as the cost of deposits went up. However, given that interest cost has come down despite higher corporate lending rates, it is likely because term loan offtake is lower in the year.

RBI data showed that banks' median one-year MCLR rate rose 5 bps to 9% in Q3. Over a longer period—between December 2023 and December 2024—the median one-year MCLR increased by 25 bps.