Core profit growth at India's top companies has slowed down sharply from last year's levels, hampering efforts to cut debt in one of Asia's most leveraged corporate sectors and dampening the private investment needed to spur sluggish economic growth.
With a majority of Indian companies already reporting financial results for the quarter to end-September, 53 top firms have shown collective 9.4 percent growth in core profit, the slowest since January-March 2013, according to Reuters data.
That compared with average quarterly profit growth of 16.9 percent in the previous financial year that ended in March, the data showed.
Slowing profit growth will weigh on spending by the companies, which, analysts say, are already utilizing the majority of their operating profit to service interest costs. Debt for India's 963 companies covered by Thomson Reuters StarMine reached more than $640 billion, or more than 40 percent of India's gross domestic product.
Disappointment over earnings has helped send Indian shares down for two consecutive weeks now and pushed the broader market into negative territory for the year, with the main index down about 5 percent.
"The ability to service debt, as measured by interest coverage, is continuing to deteriorate," said Rakesh Valecha, head of credit and market research at credit agency India Ratings.
Midway through India's fiscal year, debt-to-equity ratios at the 53 companies had fallen slightly to 1.05 from 1.10 in the six months to March - still the highest in Asia, and more than double the 0.40 in China, the data showed.
But debt-to-forward core profit estimates, a broad measure of how many years it would take to pay off debt, rose to 2.39 in the April-September period from 2.30 in the previous fiscal half year. That means it could take almost five years of annual profits to pay all debt.
Corporate debt in India is particularly high in the resources, infrastructure and construction sectors, along with telecoms, where firms paid handsomely to snap up spectrum.
Credit Suisse estimates Indian conglomerates with the biggest gross debt, including infrastructure builders Lanco Group and GVK Group, have debt that is seven times core profit, while their interest cover, a measure of their ability to pay down debt, is less than one, below the 1.5 that is generally considered as the minimum necessary.
The result is companies are focusing on cutting back that debt, at the expense of much-needed spending. India Ratings estimates two-thirds of operating profit among the country's top companies is being used to service interest.
The lack of private spending was seen as a major reason why the economy grew more slowly than expected in the first three months of India's fiscal year that runs from April to March.
The government is now stepping up to take up some of the private sector investment slack, seeking to build roads, highways and railways.
But how much it can ultimately spend is in doubt given it is also diverting some of its budget funds to bail out state-owned banks and has a deficit target to hit.
"They have used the fiscal space to push their spending on building road infrastructure," said Somasekhar Vemuri, a senior director at CRISIL Ratings.
"Whether this is enough to revive animal spirits, we'll have to wait and watch."