India Ratings and Research (Ind-Ra) in its latest report has said that the rising interest rate burden, which is near the pre-pandemic levels and already up 30 per cent over FY22 levels, will force companies to reverse their deleveraging course this fiscal (FY24). The current fiscal is also likely to witness a 25 per cent increase in interest servicing cost.
According to the report, top 3,360 plus non-financial, debt-heavy corporates have a debt burden of about Rs 36 lakh crore as of H1 FY23 and their interest outflow will jump to Rs 3.38 lakh crore in FY24 from Rs 2.52 lakh crore in FY22. To tame the stubbornly high inflation, the Reserve Bank has hiked the key policy rates by 250 bps so far since May 2022 and at 6.50 per cent it is already 25 bps more than the pre-February 2020 levels.
The report further said the tailwinds of a lower interest burden owing to a low-interest rate regime and a debt reduction are likely to be reversed in FY24, even without a meaningful increase in leverage, which however, is unlikely to lead to any broad-based credit deterioration, given the headroom available in terms of significant deleveraging and margin growth with most large companies.
The cost of debt is likely to increase across all categories irrespective of the size of the corporate in FY24 compared to FY22. A sharp rise in interest rates and higher working capital financing are likely to increase interest outflow to Rs 3.38 lakh crore in FY24 from Rs 2.52 lakh crore in FY22, which is based on the interest costs on a net basis of around 3,365 non-financial, debt-heavy corporates with a total debt of about Rs 36 lakh crore as of H1 FY23.