Credit outlook for India Inc will be stable: ICRA

• HDFC
• 06 Sep 2018
• Knowledge Centre

HDFC, Tester

Despite what cannot be called a stimulating global economic environ, India Inc is expected to be in a fairly healthy position for the remaining part of this fiscal. According to a wire agency report, the non-infra corporate sector has witnessed some revival in growth and profitability indicators over the last 2-3 quarters of FY2018, led by consumer-oriented sectors.

 

As per an ICRA report, ‘Indian Corporate Sector, Credit Outlook for FY19’, the sectors that have witnessed a pick-up in demand are automobiles, FMCG, consumer durables and retail, mainly owing to a low demonetisation base and improved consumer demand on the back of the benefits of the 7th Pay Commission, rural recovery and GST rate cuts.

 

Positive indicators

 

The good news is expected to continue going ahead, on the back of improved rural sales and a favorable outlook driven by expectations of normal monsoons, hike in MSP and the Government’s thrust on the agricultural economy ahead of the elections.

 

Mr.Subrata Ray, Group Head - Corporate Sector Ratings, ICRA says, “We believe that a pick-up in the affordable housing and infrastructure segments, primarily road and irrigation projects, are likely to support demand growth going forward in core sectors like cement and steel. Cement production has been on an improving trend over the past few quarters, post demonetization, GST implementation and disruption in the availability of sand. Likewise, steel consumption also grew by approximately 6% during FY18, and is likely to grow between 5-6% in FY19, aided by the Government’s infrastructure push.”

 

According to the ICRA report, rising commodity prices and Rupee depreciation, coupled with rising inflation and interest rates, could affect earnings and the credit outlook of airlines, automobile, consumer durables, FMCG, chemicals, and paints going forward. However, companies in oil exploration and metals segments will be the key contributors to an improvement in EBITDA margins. This is mainly owing to steadily rising commodity prices. Accordingly, ICRA estimates that EBITDA of the corporate sector will grow at a faster pace of 13% in FY19 vis-a-vis a turnover of 8%.

 

Capital expenditure requirements have been modest over the last several quarters, according to the ICRA report. Among the key investment-driving sectors, only a modest annual capacity addition of 17-18 GW in the power sector over the next two years is expected. Steel and cement are expected to witness only brownfield additions, as companies opt for M&A opportunities in the stressed asset space, according to the wire agency.

 

However, investments in the automobile sector will continue at the same pace to augment capacity, as well as product development requirements to meet upcoming emission norms and safety regulations.

 

With an improvement in commodity prices and overall demand, the financial performance of metal companies has improved substantially during FY18 and is likely to improve further, which is expected to ease pressure on the overall corporate sector's credit metrics. In the construction sector as well, stress appears to have bottomed out. This was aided by divestments, fund-raising initiatives and overall improvement in execution and order inflows.

 

Vulnerable segments

 

“ICRA has a ‘stable’ outlook on the majority of the corporate sector. However, industries facing significant headwinds are airlines, telecom, real estate, pharmaceuticals, IT and sugar. While the outlook is ‘negative’ for airlines, telecom,and real estate, earnings are expected to remain under pressure in pharmaceuticals, IT services,and sugar,” added Mr. Ray.

 

The airline industry has been affected by increasing fuel prices and weak pricing power, despite healthy traction on demand. The telecom sector has also been impacted by overall low ARPUs due to competitive pressures and a high debt burden. The real estate sector has also undergone a continued phase of stabilization and consolidation, post the Real Estate Regulation and Development (RERA) Act and GST implementation.

 

According to the report, the pharmaceutical sector is grappling from pricing pressure in the US generics market, limited new product launches in the generics space and higher costs associated with regulatory compliance. While earnings for IT companies have been on a declining trend, reflecting the challenging operating environment characterized by continued pressure on commoditized IT services, wage inflation, higher onsite costs necessitated by visa curbs, as well as lower discretionary spend by corporates.

 

The domestic sugar industry is currently going through a period of over-capacity, with sugar production growth ~45-50% during 2018, driven by a recovery in sugar production from key sugar-producing states viz.Maharashtra and Karnataka, where relatively better monsoons over the past couple of years have led to improved cane availability. This has resulted in a sharp drop in realizations and in turn the earnings and credit metrics of sugar companies.