The cash generation ability of BSE 500 corporates, an index of 500 top public listed firms by market cap, that determines their ability to service debt has deteriorated and at a pace faster than what the EBITDA margin drop indicates, according to India Ratings & Research (Ind-Ra). Ind-Ra is a part of rating agency Fitch.

While the rate of EBITDA margin deterioration has slowed down as per the latest available financial numbers, cash-based margin measures such as funds from operations (FFO) and cash flow from operations (CFO) margins continue to show a steeper deterioration since 2010.

“This clearly implies that the revenue growth and EBITDA margins were at the expense of higher level of working capital reflected in the credit growth trend of banks,” the report said.

In order to ascertain the credit quality trends of Indian corporates, Ind-Ra has focused on FFO-based measures of interest coverage.

EBIDTA trends, on an overall basis, show a mixed picture. Companies with recovering EBITDA marginally out-number those with deteriorating EBITDA.

“However, the FFO coverage-based analysis presents a more sombre picture. There are 11 industries where over 50 per cent of companies in the respective sectors have shown a deterioration in FFO coverage ratio from 2011. Within these sectors, the cash generation ability of the businesses may actually have deteriorated in sectors such as media and entertainment, cement, fertilizers and telecommunications despite these sectors exhibiting EBITDA growth,” the report said.

Some of these sectors are burdened with increasing receivables and other non-cash accruals which do not necessarily better their debt servicing ability. This is particularly true for the current situation where the banking system liquidity is low and credit costs are high.

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