India Inc’s cash ammo, lower debt offer cushion. But there's a problem

Renowned hedge fund manager and billionaire Ray Dalio warns of something worse than recession if the tariff situation is not handled well. India is a more domestically focused economy than many Asian peers that are feared to bear a significant brunt of the trade disruption even as micro-level repercussions remain a focal point for the country.

With recession concerns feared to dent global business confidence, is India Inc. better placed now than in the previous crisis? From India’s own macro-stability and balance sheet perspective, the current environment is much better than 2008 or 2020, says Nuvama Research.

“In 2008, large corporate excesses took place and hence a downturn led to permanent scarring. This time around, corporate balance sheets are in excellent shape and are throwing up record-high free cash flows. Thus, the scarring risks should be limited this time around," said a Nuvama report dated on 7 April.

Robust cash flows and debt reduction by Indian corporates across sectors provide improved financial stability to tackle the slowdown.

A recent report by DSP Asset Managers showed that as of FY24, nearly all sectors have exhibited some of the strongest balance sheet positions in their history. “Some cyclical industries, such as chemicals and metals, have significantly reduced their debt funded assets over the years. In fact, most sectors are experiencing their lowest median debt-to-assets percentage on record," added the DSP report.

For instance, the information technology sector has seen this metric fall from 16% in FY08 to 8% in FY24; and for healthcare, it has declined from 34% to 12%. The debt-to-asset reading indicates the percentage of a company's assets financed by debt, it is calculated by dividing total debt by total assets. A lower reading is positive.

Amid a wobbly external demand scenario, the Reserve Bank of India’s (RBI) monetary policy easing and measures to boost liquidity should spur domestic consumption. RBI kicked started its loosening cycle in February and has so far cut repo rate by 50 basis points to support growth as inflation outlook improves. The change in stance by RBI signals further easing.

Also Read: India's economy strengthened in February, but external weakness remains a worry, shows Mint tracker

All's not well

Not all is hunky dory as a spillover of a global economic slowdown would weigh significantly on topline/revenue growth trajectory of Indian companies. “We have been arguing that two–thirds of India Inc’s top line is directly or indirectly influenced by global growth," says Nuvama. Revenue growth trends have been muted lately, making the risk of earnings downgrades for FY26 more pronounced than before.

“We have seen moderate cuts of around 4% to Nifty50 consensus earnings estimates over the past two weeks with the cuts stemming from (1) consumer staples on continued weak demand conditions, (2) IT services (on demand uncertainty) and (3) oil, gas & consumable fuels (on lower crude oil price assumptions). We would not rule out further earnings downgrades over the next few months in Nifty EPS," said Shrikant Chouhan, head of equity research at Kotak Securities.

True, the valuation of Indian equities has moderated after the steep correction, given the downside risks to earnings, but they may still not be as attractive. The MSCI India index is trading at one-year forward price-to-earnings of 18x, showed Bloomberg data, versus 11x and 10x, respectively, for MSCI Asia Ex-Japan and MSCI Emerging Markets indices.

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