Two successive rate hikes by the Reserve Bank of India (RBI) - 40 bps in May and another 50 bps in June; and the resulting reversal in the interest rate cycle could hit corporate profitability in the coming quarters, Business Standard said in a report.
As per the report, the decline in profitability could be since India Inc gained handsomely from a decline in interest rates in the financial year 2020-21 (FY21) after the central bank cut the policy rate to a record low of 4 percent in May 2020 and expanded liquidity after the outbreak of the Covid-19 pandemic.
In all, companies in Business Standard’s sample saved nearly ₹1 lakh crore from the decline in interest rate in FY20 and FY21, which boosted India Inc’s bottom line, it stated, adding that as a result, India Inc’s interest burden eased despite a steady rise in overall corporate borrowings.
The combined interest burden for listed companies excluding banking, financial services, and insurance (BFSI) declined 7.3 percent between FY20 and FY22, even though there was a 12 percent rise in borrowings, BS further informed.
It is important to note that the analysis is based on a common sample of 963 companies ex-BFSI that are part of the BSE500, BSE MidCap and BSE SmallCap indices.
"The companies in the sample reported record-high gross borrowings of ₹36.08 lakh crore at the end of FY22, up 2.7 percent year-on-year (YoY) from ₹35.12 lakh crore. Their combined interest payment, however, declined 3 percent YoY to ₹2.51 lakh crore in FY22 from ₹2.59 lakh crore in FY21, and a record high of ₹2.71 lakh crore in FY20," noted the market daily.
It further pointed out that the combined net profit of these non-BFSI companies rose 63.6 percent YoY in FY22, even though their operating profit (or Ebitda) rose just 27.4 percent YoY, and combined net sales increased 31.1 percent YoY. The bounce in earnings growth came from the 3.1 percent YoY decline in interest cost and a slower 7.3 percent rise in depreciation allowance, it added.
According to BS, the two successive reductions in the policy rate by the RBI in 2020, coupled with a massive infusion of liquidity, resulted in a sharp decline in interest rate, benefitting all borrowers.
“The overall corporate earnings in FY23 will be at least 15-20 percent lower than what the market expected at the beginning of the current fiscal. The earnings will be affected by a host of factors, including lower top-line growth, higher input price, and rise in borrowing costs,” said Dhananjay Sinha, managing director and chief strategist at JM Institutional Equity told BS.
"The rate hikes are expected to raise banks’ costs of funds as well, but market participants expect them to more than makeup for it by raising lending rates. The risk is that a rise in lending rates could lower demand for retail credit even as higher inflation hits growth in their loan book," stated the BS report.