Mumbai: Crisil Ltd, the Indian unit of Standard and Poor’s (S&P), has predicted that revenue growth of Indian companies in the three months ending 30 June will decelerate to 14%, the slowest pace in six quarters, as they battle a “policy logjam”, weak demand and costlier capital.
It also said that capital expenditure (capex) levels and interest coverage ratio, a measure that determines the ease with which a company can pay interest on outstanding debt, have dropped to 2008-09 levels, when the global financial crisis had roiled markets.
Corporates reported a revenue growth of 17.5% during last year’s June quarter and 17.2% in the quarter ended 31 March. Crisil’s report, which studied 247 companies across 26 sectors, reinstated the gloomy outlook painted by recent reports from S&P, Fitch Ratings Inc. and other economic data.
The Crisil report, however, pointed to some bright spots. It said margin pressures were likely to abate as export-driven industries such as pharmaceuticals, information technology and telecommunications will possibly witness a rise in profitability. Ebitda (earnings before interest, tax, depreciation and amortization) this quarter has remained largely flat at 19-20% compared with a year earlier.
The bright spots are, however, outnumbered by gloomy findings. Corporate investments in fixed assets, according to the Crisil report, at about 13% was at a five-year low, reflecting an “investment slowdown”, and wasn’t expected to pick up because of global uncertainty and delayed approvals in India.
“The biggest slowdown was seen in the housing, cement and telecommunication sectors,” Prasad Koparkar, senior director with Crisil told reporters in a conference call on Tuesday. The interest coverage ratio was driven to a three-year low, beaten down by high interest rates and margin pressures. Financial stress was most visible in textiles, shipping, real estate and the aviation sectors, the report found.
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“Interest rate coverage is bound to fall because net profits are contracting and the tax rate is increasing. This is likely to remain (so) for the next four to five quarters,” said Dhananjay Sinha, co-head, institutional equity research with domestic brokerage Emkay Global Financial Services Ltd. “There will be an increase in capex only when confidence in profit growth is restored.”
Crisil analysts, Koparkar and Mukesh Agarwal, president of research, said that while the interest coverage ratio was very low, their analysis of companies’ balance sheets revealed that “structurally companies were in good health” and “if there was policy action, they could bounce back”.
The stress is also visible in the form of rising defaults by borrowers, reflecting in elevated non-performing assets (NPAs) levels. “The NPAs for the private sector had decreased while those for the public sector rose. But overall the asset quality is stretched,” said the two Crisil analysts. They expect NPAs to rise from the current 2.8-2.9% levels to 3.2% by the end of fiscal 2013 in the base case scenario or to about 3.5% if conditions worsen.
The Crisil report came a day after Moody’s Investors Service Inc. retained a ‘stable’ outlook on India’s credit rating despite slowing economic growth and accelerating inflation.
Moody’s said the current scenario for the domestic economy was unlikely to have any long-term impact on the country’s credit ratings, currently at “Baa3”—Moody’s lowest investment grade rating.
Moody’s in effect broke ranks with its peers S&P and Fitch Ratings, which published scathing reports in quick succession on the Indian economy in June.
S&P questioned if India would “be the first fallen BRIC angel” and warned that it could reduce the country’s rating to “junk” status citing “slowing GDP growth and political roadblocks to economic policymaking” as reasons that “could put India at risk of losing its investment-grade rating.” Fitch, a few days later, scaled down India’s sovereign credit outlook to “negative” from “stable” voicing concerns over the same issues. So far, the two rating companies have only sounded a warning and have refrained from downgrading the country’s rating.
Graphic by Ahmed Raza Khan/Mint
Sunil B.S. and Bhuma Shrivastava contributed to this story.