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A tenuous balance

Companies that may face problems servicing their interest payments should their profitability fall


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This old article may have references to outdated tax rules and laws. For up-to-date information on taxation of mutual funds, refer to https://www.valueresearchonline.com/tax/

It is very important to do a worst-case scenario analysis for the companies which you are considering to buy. We often get carried away so much by the potential upside of a company that we ignore the possible downside. One should always try to find out the answer to the question whether the company would be able to take the blow in the case of the worst-case scenario.

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We looked at the interest costs incurred by companies. Interest is a charge which has to be paid despite the scale of the business in a particular year. We checked profitability before interest and taxes (EBIT) and how much easy it is for a company to pay the interest amount. We wanted to know how much fall (in per cent) in EBIT will cause a company to face problems in paying interest.

For example, as per the latest results, India Cements generated EBIT of R482 crore, while the interest incurred was R478 crore. Assuming the same interest rates for the next year, if the company witnesses a fall in the EBIT of more than 1 per cent, it will face problem or losses. Similarly, we have mentioned a list of companies from the BSE 500 index which may face problems in case the EBIT falls up to 20 per cent. We have excluded the companies which are already loss-making at the EBIT level.

Margins don't lie

Company nameEBIT (Rcr)Interest (Rcr)Margin of safety (%)
The India Cements4824780.9
Videocon Industries240223522.09
Sterling Holiday Resorts334.4
Jain Irrigation Systems5004696.21
Jaiprakash Power Ventures235121896.88
BEML76717.15
Hindalco Industries451941787.53
Alok Industries247422628.58
Delta Corp565010.52
Jubilant Life Sciences34330311.75
Bombay Dyeing & Manufacturing26323211.85
Future Lifestyle Fashions18215812.91
NCC85073713.26
Swan Energy353014.38
Ruchi Soya Industries65455115.68
JBF Industries51342417.43
Simplex Infrastructures48039318.17
Rain Industries72458818.67
Future Retail84067919.1
* Margin of safety is the maximum fall in profit that a company can tolerate before its interest payment equals the profit generated. Data based on TTM.

This old article may have references to outdated tax rules and laws. For up-to-date information on taxation of mutual funds, refer to https://www.valueresearchonline.com/tax/

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