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India Ratings and Research (Ind-Ra) expects the overall recovery path to be pushed back for most of the service-oriented sectors to FY22, owing to a major supply-side disruption from the second wave of COVID-19 infections.

While FY22 is likely to be better than FY20 for most of the sectors due to an improvement in revenue benefitting largely from elevated prices and pent-up demand resulting in higher volume growth, volatile commodity prices along with interest rates reversal and currency depreciation is likely to keep a check on profitability, the agency said in a statement.

Credit Profile Likely to be Tested in FY23: Ind-Ra expects a moderation in growth in FY23, given a moderation in consumption and investment demand outlook and smoothening out of supply chain issues, and the consequent possible moderation in prices.

Although debt restructurings have been availed by a relatively a smaller number of entities in FY21, given other forms of fiscal or monetary support from the government such as Emergency Credit Line Guarantee Scheme, FY23 is likely to test the credit profiles of entities with a pre-existing debt-heavy balance sheet and/or those who have increased the debt levels and/or are faced with ongoing stress on cash flows having limited cushion to absorb any shock on leverage.

Ind-Ra expects an overall median growth of 6% for corporates in FY22 over FY20 and 21.2% over FY21. This is an increase from the agency’s earlier estimate of a median growth of 4.4%.

The gains in FY22 is primarily a result of some level of consolidation resulting in bipolarisation, meaning larger companies growing faster than smaller ones.

Moreover, excess cash used for deleveraging across sectors would result in higher operating leverage supporting the overall credit profile of corporates. However, sectors such as pharma, chemicals, cement or steel may witness some capex on account of higher liquidity cushion with them.

Discretionary Bucket Worst Hit, While Essential Bucket Performed Better: In Ind-Ra’s assessment, household essentials, steady state and acyclical sectors (pharma, telecom and fertilizers) and non-discretionary, consumer goods and critical infrastructure sectors (chemicals, healthcare, IT, sugar, agro commodities) have shown signs of early recovery.

Within the essential bucket, telecom is likely to benefit from consolidation while improvement in fertilizer is likely to be driven by expected subsidies granted by the government of India, thereby reducing working capital needs.

Within the non-discretionary bucket logistics ports is likely to see growth on account of expectation of strong GDP growth, the oil and gas sector is likely to witness contraction due to higher commodity prices, and IT and paper sectors are likely to witness an improvement on the back of higher demand.

Industrials, goods and services, and cyclical sectors (steel, logistics, cement, construction, realty commercial) are likely to be marginally better than Ind-Ra’s expectation and could see a recovery in 1HFY22 from FY20 levels.

Within these, iron and steel, non-ferrous, cement and engineering, procurement and construction are likely to surpass Ind-Ra’s expectation, largely benefitting from higher prices and pick-up in volumes. On the other hand, realty commercial retail is likely to be below Ind-Ra’s expectation, given concerns about the impact of the pandemic on the upcoming providers of office space who are likely to struggle, as office offtake may be under pressure due to the continued prevalence of work-from-home culture.

A further weakening in the financial position of distribution companies due to COVID-19-led business disruptions is likely to impact the power sector. However, an improvement in power demand visibility and stress on privatisation may bring the required efficiency in the sector.

Sectors linked to consumer discretionary expenditure and exports are likely to witness a lower-than-expected improvement. Within these sectors, airlines, real estate residential and hotels would be the most severely impacted and may not see recovery until 2HFY22.

Recovery paths for entities in these sectors would necessitate continued support from the fiscal and monetary authorities, failing which the recovery could get further extended. However, sectors such as auto and auto ancillaries are likely to be better than Ind-Ra’s expectation due to a rebound in volume growth. However, rising input costs could act as a headwind for the sector.

Ind-Ra notes that FY21 was better than Ind-Ra’s estimate benefitting from a sharper economic recovery. Several timely supportive fiscal and monetary policy measures supported liquidity. Ind-Ra expects the corporate growth to decline 3%-5% yoy in FY21 compared with its earlier estimate of a decline of 12.2% yoy.

Rating actions in FY21 in Sync with Recovery Framework: Ind-Ra’s rating actions mimics its expectation with regard to its recovery framework for each of the 35 corporate sectors in the large corporate portfolio. The negative rating actions in FY21 have been limited to the industrial and discretionary buckets, and primarily to those who entered the COVID-19 crisis with pre-COVID-19 issues of significant leverage and where credit profile was unlikely to reverse to their pre-COVID-19 levels.

Ind-Ra has been communicating to the investors and issuers its views on the recovery path of each of the sectors since the onset of COVID-19 in April 2020. The agency will continue to communicate any change in its assumptions and the trajectory of recovery. Furthermore, it will continue to communicate entity-wise assumptions it is making while evaluating each credit as part of its rating action commentary.

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