Mumbai: Indian companies will see improved credit profiles in 2018 driven by solid economic and Ebitda growth, backed by new production capacity and benign commodity prices, Moody’s Investors Service said days after it upgraded the country’s sovereign rating.

Ebitda—earnings before interest, taxes, depreciation and amortization—is a measure of operating profitability.

In a report titled Non-financial corporates—India, 2018 Outlook released on Wednesday, the rating agency said that with the disruption from the good and services tax (GST)’s implementation diminishing, economic activity in India would recover by next year.

“We expect that domestic GDP growth of around 7.6% will result in higher sales volumes, which—along with new production capacity and benign commodity prices—will support Ebitda growth of 5-6% over the next 12 to 18 months," said Kaustubh Chaubal, vice-president and senior analyst at Moody’s.

Last week, the global rating agency upgraded India’s sovereign rating after 13 years to Baa2 with a stable outlook, from Baa3 earlier.

Refinancing needs in 2018 would be manageable for most companies, given their improving access to capital markets and their large cash balances, said Saranga Ranasinghe, Moody’s assistant vice-president and analyst. “Cross-border bond maturities will also be manageable for the next three years," he added.

The report said the simplification of GST and other structural reforms along with improvement in commodity prices could result in higher Ebitda growth. “Improvement in asset valuations could provide means of deleveraging of some corporates," it said.

However, the report warned that downside risks could include GDP growth falling below 6% and a weakening of commodity prices, resulting in lower Ebitda growth. Besides, slow pace of reform and political uncertainty, higher interest rates brought on by rising inflation and/or exchange-rate volatility and a tight funding environment could impact firms’ credit profiles.

The report pointed out consolidation in the oil and gas, telecom and steel sectors will affect credit quality of companies in those sectors.

Some of the sectors for which the rating agency has given a stable outlook include energy exploration and production, refining and marketing, as well as real estate. Steady production volumes, low subsidy burden and relatively stable oil and gas prices would sustain earnings at current levels for energy firms. “The outlook is also stable for refining and marketing as capacity additions and higher margins increase earnings," it added.

In the real estate sector, sales volume would pick up in the affordable housing segment, while the new real estate regulations would improve transparency, it said.

However giving a negative outlook for the telecom sector, the report warned that intense competition in industry could result in lower profitability, higher capital expenditure and consolidation. “Intense competition would continue to pressure revenues and margins over the next 12 months, while industry consolidation would result in the emergence of three big players."

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