Global Credit Research – 04 Jan 2017
Singapore, January 04, 2017 — Moody’s Investors Service and its Indian affiliate, ICRA Limited, say that their stable outlook for non-financial corporates in India (rated Baa3 positive by Moody’s) over the next 12-18months reflects in large part the country’s sustained economic growth.
“Strong GDP growth, capacity additions and stabilizing commodity prices will support EBITDA growth of 6%-12% over the next 12-18 months,” says Laura Acres, a Managing Director in Moody’s Corporate Finance Group.
Moody’s also points out that the capex cycle for Indian corporates has peaked, as projects near completion,and declining investments will slow the pace of borrowing over the next 12-18 months. Moreover, refinancing needs are manageable for most corporates in 2017, given their better access to the capital markets and large cash balances.
“As for specific sectors, our outlook for the power, hotel and sugar industries is stable, while that for the realestate and cement sectors is negative,” says Subrata Ray, Senior Group President and Head of Research for ICRA.
ICRA says that distribution utilities will benefit from the lower cost of power purchases, due to improveddomestic coal availability, the subdued tariff level of short-term traded power, and flexibility provided by thegovernment to generating companies for the optimal utilization of coal.
ICRA also points out that an improvement in domestic coal availability has substantially mitigated coal supplyrisk and the risk of under-recovery in fuel costs — due to a reliance on costlier coal imports — for thermalin dependent power producers.
Moody’s stable outlook for exploration & production companies reflects higher production volumes, low subsidyburdens and a recovery in oil prices, which will offset lower natural gas prices and higher royalty payments.
In the refining & marketing segment, Moody’s says that its stable outlook is based on the fact that capacityadditions will partly offset weaker refining margins, while marketing margins will remain stable.
Moody’s also maintains a stable outlook on the Indian telecommunications sector. Moody’s says that whilecompanies in this sector face intensifying competition — which will pressure margins — such a situation shouldbe offset by growth in data consumption.
As for the auto sector, Moody’s says that its outlook for the industry is stable, because companies in this industry should benefit from improving customer sentiment, following an above-average monsoon season, as well as likely falling vehicle prices, after the implementation of the goods and services tax in April 2017 that will replace a web of taxes. In the near term, however, sales volumes could be negatively affected by demonetization.
ICRA explains that its outlook on the cement sector is negative, because cement demand growth — which has stagnated around the mid-single digit over the last few years — will likely be further negatively affected by demonetization through the real estate sector, which is a major consuming segment.
In the short-term, ICRA says that the cement industry will likely experience stretched receivables, given theirneed to provide liquidity to offset the impact of demonetization. ICRA points out that cement prices have fallenacross regions following demonetization; this situation, combined with increased input prices — such aspetcoke and rising freight costs — will adversely affect profitability.
ICRA’s outlook on the sugar sector is stable. ICRA expects domestic sugar production to fall 8% during October 2016 – September 2017 on lower cane availability, owing to poor monsoons in CY 2015. While monsoons have been relatively better in CY 2016, its impact on sugarcane production will be felt only between October 2017- September 2018. Accordingly, ICRA expects sugar prices to remain firm in the near-term, onlower production, low sugar stocking levels and a global supply deficit.
ICRA points out that while sugar prices have remained strong, cane prices have only increased modestly. This situation, along with strong by-product prices for molasses, alcohol, and bagasse should support profit margins for sugar companies. However, company balance sheets will remain under strain, due to past losses.
With the real estate sector, Moody’s expects the country’s demonetization to negatively affect sales volumes.never the less, volumes will start to pick up, as interest rates fall.
On the hotel industry, ICRA says that large supply additions — which had plagued the industry in the past several years — will likely moderate to a compound annual growth rate of about 8% over the next four years.
Based on the improved supply absorption — supported by double-digit growth in demand — ICRA expects a gradual improvement in revenue per available room. Better profit margins will also improve debt coverage indicators.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit ratingaction information and rating history.
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