Subdued demand and high debt will continue to constrain rated Indian companies in 2016, credit assessor Standard and Poor’s (S&P) said in a note published on Tuesday.
Debt levels at rated Indian companies are near their peak following a significant increase in debt-funded investments over the past five years, S&P said.
The fact that these investments have run into anaemic demand conditions in the economy has put pressure on their profitability.
In a separate note, the rating agency said that it expects India’s sovereign credit rating to remain unchanged this year and next year based on its current forecasts. S&P expects the Indian economy to grow at 7.4% in 2015 and 8.1% in 2016.
“Economic conditions in India remain lacklustre despite several government measures to boost investments in the economy,” said S&P credit analyst Mehul Sukkawala. “Companies still face anaemic demand and lower capacity utilization, resulting in weak profitability.”
Companies with high levels of debt remain vulnerable to downgrades, the rating agency said, adding that lower commodity prices have also reduced the headroom for some firms operating in commodity-linked sectors such as metals and oil and gas. The credit quality of half of S&P’s portfolio of 22 rated firms in India is expected to remain stable in 2016.
The rating agency added that the debt profiles of rated Indian companies will improve over the next two years because most private firms are not initiating large projects and are focusing on reducing debt organically and inorganically.
“We believe the first six to nine months of 2016 will be crucial for rated Indian companies. This period will provide signs on whether domestic demand is reviving, government reforms are moving ahead, and global economic conditions are stabilizing,” said Sukkawala.
On the impact of global developments—such as higher interest rates in the US and a slowdown in China—on Indian firms, S&P said the Chinese impact will be limited; the impact of higher US rates should be manageable.
“A slowdown in China is not a key factor for the credit profiles of most rated Indian companies because these companies target the domestic or developed markets,” said Sukkawala. “That said, any further slowdown in China could trigger significant turbulence in the global financial and commodity markets and hurt Indian companies.”
The Chinese economy grew at 6.8% in the October-December 2015 quarter, marginally below the Bloomberg estimate of 6.9%, according to data released on Tuesday.
The impact of higher US interest rates on Indian firms would come largely through the exchange rate channels. The Indian rupee has depreciated to a 28-month low and was trading at levels close to 67.74 per dollar on Tuesday. The fall is due to outflows from the domestic equity markets and a stronger dollar.
“The expectations of a rise in US interest rates should be manageable but any related fallout from sudden and significant depreciation of the Indian rupee could pose a bigger risk to our rated portfolio,” said S&P.
Meanwhile, the outlook for India’s sovereign rating remains stable. Upward room on the rating could emerge if government reforms improve its fiscal position or if the level of government debt falls below 60% of gross domestic product.
“Downward pressure on the ratings could re-emerge if growth disappoints (perhaps as a result of a stalling of reforms), if, contrary to our expectations, the new monetary council is not effective in achieving its targets, or if the external liquidity position of the nation deteriorates more than we currently expect,” S&P warned.
S&P currently has a rating of BBB-, the lowest investment grade rating, for India, with a stable outlook.