Date:14/11/2004 URL: http://www.thehindubusinessline.com/2004/11/14/stories/2004111401850100.htm

Back Interest costs rise for 460 firms in first half

Suresh Krishnamurthy

BANKS have increased their loans to companies in the first half of this fiscal by 16 per cent. One would have thought that this must have also reflected in higher interest costs for the companies. Paradoxically, that has not happened and, instead, interest costs for a sample of 1,450 companies have actually declined by about 6 per cent.

About 460 firms, however, have reported a rise in interest costs. And 360 of these firms have reported at least a 10 per cent increase in interest costs. The aggregate interest cost of these 460 firms has jumped up by 41 per cent. Prominent companies that reported a rise in borrowing costs include Reliance Industries, Ispat Industries, Indian Oil, Essar Shipping and Tata Teleservices. These 460 firms account for half of the aggregate sales of the 1,450 firms in the sample. The sample does not include banks and financial services firms.

The aggregate after-tax profits of companies that reported a rise in interest also went up only at about 17 per cent compared to a robust growth of about 47 per cent by companies that reported a dip in interest costs.

The lower growth in profits was also due to a relatively larger rise in depreciation costs. Aggregate depreciation costs of these firms rose 18 per cent compared to an average of 12 per cent for the sample. This suggests that companies that have incurred capital expenditure in the previous years are now reporting rising interest costs.

In addition, companies that borrow in foreign currency such as Indian Oil, Reliance Energy, Essar Shipping, Tata Motors and GE Shipping reported a sharp rise in interest costs.

The increase in LIBOR in the past six months and the depreciation in the value of rupee are probably reflected in the rise in interest costs.

In the case of refining companies, the increase in subsidy component may be the reason for the higher interest payments.

Companies that reported a reduction in interest costs include SAIL, Mangalore Refineries, IPCL, Nagarjuna Fertilisers and Gujarat Industries Power. These companies form part of the majority who reported a higher reduction in interest costs in the first half of this financial year compared with the reduction in the first half of 2003-04.

What is interesting is that interest costs in the economy also did not come down as it had in 2003-04. If anything, there was actually a rise in interest rates during this period; interest rates on Government paper were up by 2 percentage points.