Time to turn cautious on rated Indian Corporates, says S&P

February 22, 2019

SINGAPORE -- Revenue growth at Indian companies that S&P Global Ratings rates is likely to slow down over the next 12-24 months, according to a report published today by S&P Global.

Global risks, such as stability of commodity prices and demand from the U.S. and China, will have a greater influence on the fortunes of Indian companies than domestic demand in the next year or two, the report says.
 "Indian corporate performances should remain stable, given low costs, capacity expansion, and benign input prices," said S&P Global Ratings credit analyst Krishnakumar Somasundaram Vishwanathan. 
"With the exception of telecoms, growth in other sectors in India has been accompanied by margin stability, and we expect this trend to continue."
 The revenue environment for rated corporates is facing increasing global risks such as China's slowdown, trade war escalation, or a disorderly Brexit, the report says. 
"In our view, capital expenditures will be concentrated in five companies in fiscal years 2020 (ending March 31) and 2021 for either one-off capacity building or defending market position against disruptive trends.
 "A gradual taper-down of capital expenditures for rated companies in aggregate is likely to turn discretionary cash flows positive for the first time in three years." 
S&P believes that, over the decade from fiscal 2011 to fiscal 2020 (estimates), rated corporates will be doubling their aggregate EBITDA but also tripling their debt. 
Despite the earnings expansion, rated Indian corporates still have debt levels nearly at the peak of the decade.
 "We expect half a turn of deleveraging over the next two years, which means debt to EBITDA reducing by 0.5x. But some corporates in cyclical industries still have higher leverage than global peers, in addition to a reduced financial cushion in the event of a downturn," Vishwanathan said.
 India's central government elections this year also may pose additional risks for Indian corporates, the report says. "A change of administration may trigger expansionary Government spending that pushes up borrowing costs or raises inflation."  www.standardandpoors.com (ATI).