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Tipping point
The current 50 basis point reduction, if passed on entirely by lenders, will benefit some companies disproportionately

Jitendra Kumar Gupta

Corporate India was hoping for a 25 basis point cut and got 50. While it may feel like manna from heaven, that feeling is not pervasive across the board. The RBI has cumulatively cut the repo rate by 125 basis points so far but companies have not had much cause for cheer, courtesy their NPA-afflicted bankers. For some incorrigible indebted Indian companies, nothing short of a complete write-off from their bankers would do. But there are some companies to whom this 50 basis points cut will mean a lot once their bankers graciously pass it on. We therefore looked up the interest coverage ratio of BSE-500 companies to identify who could benefit the most and came up with this very short list.

BEML

This public sector unit makes money from mining equipment (58% of sales) and railway coaches (36% of sales). Its current profitability is depressed due to a slowdown in mining and debt raised to fund increased working capital. In FY15, it’s earnings before interest and tax of ₹81.4 crore just about covered its interest cost of ₹76 crore. But things seem to be looking up with the lifting of the mining ban in Karnataka and Goa. Fresh orders are expected from the railways, particularly for metro trains to be introduced in over 13 cities. The company’s current order book stands at ₹5,600 crore, which is over 2X FY15 sales.

PVR

India's largest multiplex chain with 474 screens has seen its debt going up because of expansion capex and acquisitions, the latest being DLF's DT Cinemas for ₹500 crore. The FY15 interest bill was ₹78 crore compared with an EBIT of ₹91 crore. Along with reduction in interest cost, analysts are hopeful that operating leverage, too, should kick in due to higher utilisation. As against 31% in FY15, the company’s current utilisation is close to 35% and should be in the range of 33-35% for FY16. "Higher footfalls and contribution from ancillary revenue streams are expected to drive revenue growth whereas margins are expected to expand in FY17 aided mainly by operating leverage benefits," writes Bhaskar Bukrediwala, analyst, Crisil, in a recent note. 

Linde India

This multinational operator supplies industrial and specialty gases to user industries like steel, chemicals, space research and medical diagnostics. Last year, on the back of borrowings, the company commissioned a new plant but sluggish demand in user industries has led to pricing pressure. While demand concerns remain, the increasing noise about making India a preferred manufacturing base could benefit a global player such as Linde. This will also mean higher operating leverage and lesser need for working capital which is largely for the project business. For the quarter ended June 2015, on the back of higher utilisation, the company reported a 5% year-on-year growth in revenues and made a ₹4 crore profit as against a loss in the corresponding quarter last year.

Jain Irrigation

This micro irrigation major’s debt is related to working capital as debtor conversion cycle is particularly long. While fresh credit is restricted to 90 days, the company has been able to bring down legacy receivable days from 243 days in Q1FY15 to 187 days in Q1FY16. That apart, because of lower crude oil price, its pipe division has benefited from the fall in price of polymer, the major raw material for its products. It is also looking at a stake sale in its food processing business. "Government initiatives like Pradhan Mantri Krishi Sinchai Yojana, extending subsidies towards implementing MIS could provide a cushion to the company’s revenue growth," says Joyjit Sinha, who tracks the company at Karvy Stockbroking.

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