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Rate Cuts are No Panacea

A rate cut alone won't change the fortunes of companies that are currently struggling to pay huge interest amounts


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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'.

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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.

High on debt

Company NameEBIT
(RCr)
Interest
(RCr)
Sales CAGR 5 Year (%)Operating CAGR 5 Year (%)
Aban Offshore184711375.663.84
ABG Shipyard179758-9.42-9.51
Ashok Leyland11943517.372.12
Bajaj Hindusthan-40368021.88-168.11
Balrampur Chini Mills18110311.1-8.56
Century Textiles44739010.52-3.85
Chennai Petroleum-948715.91-195.28
Future Retail5806387.247.08
Heidelberg Cement India1241198.440.34
IVRCL-19632-6.89-31.84
Jain Irrigation Systems58446911.885.53
Jaiprakash Associates2524309110.677.01
Jubilant Life Sciences44226710.143.1
Kesoram Industries-676372.91-19.92
Orchid Chemicals & Pharma313582.18-0.14
Piramal Enterprises5707916.434.66
Prism Cement16225424.29-4.75
Punj Lloyd-96831-3.13-23.27
Rain Industries98561524.145.42
Reliance Communications27983093-0.95-4.67
Shipping Corporation2692013.56-0.38
Sterlite Technologies1721232.62-2.63
The India Cements3333584.53-10.42
United Spirits-31762714.17-179.35
Welspun Corp257277-10.14-13.65


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