A rate cut alone won't change the fortunes of companies that are currently struggling to pay huge interest amounts
16-Feb-2015 •Vikas Vardhan
On January 15, 2015, the Reserve Bank of India (RBI) cut interest rates by 25 basis points. With inflation easing steadily, many analysts are sure that RBI would cut rates further in the current year. And they also say that the biggest beneficiaries of the rate cut would be companies with heavy debt on their books. But the big question is whether a rate cut alone would really change the fate of these 'leveraged companies'.
We mined some data to find out the companies with a high debt-equity ratio and which are currently struggling to pay huge interest amounts (very low interest coverage ratio). After crunching the data, we found that a rate cut alone won't change the fortunes of these companies in a big way. These companies will have to address some of the other critical issues that are troubling them before they become attractive investments.
For example, revenue and operating growth of these companies, which is the profit before paying the interest, have fallen in the last few years. This means these companies need to work on their own cost structure and/or business. The stocks mentioned in the table may witness a small rise in the net margins due to decline in rates, but they still will have to wait for a change in their business and market environment.
A piece of advice: Don't make your investment decision solely on the basis of rate changes. A disciplined investment approach should be consistent, and it should not change with changing market conditions. A long-term investment strategy, after taking into account the fundamentals, works in all market conditions.
| Company Name | EBIT (₹Cr) | Interest (₹Cr) | Sales CAGR 5 Year (%) | Operating CAGR 5 Year (%) |
| Aban Offshore | 1847 | 1137 | 5.66 | 3.84 |
| ABG Shipyard | 179 | 758 | -9.42 | -9.51 |
| Ashok Leyland | 119 | 435 | 17.37 | 2.12 |
| Bajaj Hindusthan | -403 | 680 | 21.88 | -168.11 |
| Balrampur Chini Mills | 181 | 103 | 11.1 | -8.56 |
| Century Textiles | 447 | 390 | 10.52 | -3.85 |
| Chennai Petroleum | -9 | 487 | 15.91 | -195.28 |
| Future Retail | 580 | 638 | 7.24 | 7.08 |
| Heidelberg Cement India | 124 | 119 | 8.44 | 0.34 |
| IVRCL | -19 | 632 | -6.89 | -31.84 |
| Jain Irrigation Systems | 584 | 469 | 11.88 | 5.53 |
| Jaiprakash Associates | 2524 | 3091 | 10.67 | 7.01 |
| Jubilant Life Sciences | 442 | 267 | 10.14 | 3.1 |
| Kesoram Industries | -67 | 637 | 2.91 | -19.92 |
| Orchid Chemicals & Pharma | 31 | 358 | 2.18 | -0.14 |
| Piramal Enterprises | 570 | 791 | 6.43 | 4.66 |
| Prism Cement | 162 | 254 | 24.29 | -4.75 |
| Punj Lloyd | -96 | 831 | -3.13 | -23.27 |
| Rain Industries | 985 | 615 | 24.14 | 5.42 |
| Reliance Communications | 2798 | 3093 | -0.95 | -4.67 |
| Shipping Corporation | 269 | 201 | 3.56 | -0.38 |
| Sterlite Technologies | 172 | 123 | 2.62 | -2.63 |
| The India Cements | 333 | 358 | 4.53 | -10.42 |
| United Spirits | -317 | 627 | 14.17 | -179.35 |
| Welspun Corp | 257 | 277 | -10.14 | -13.65 |
