India Inc is in a sweet spot but risks loom too

The economic tailwinds and improving industry conditions, however, aren’t the only factors driving earnings growth and momentum across India’s corporate space. 

Also helping the cause are rising cash flows, prudent balance sheets and falling leverage. This is despite several companies, across sectors, spending more on capital expenditure and energy-transition initiatives.

Alongside improving earnings and margins, supportive financial policies have also contributed to debt reduction for many companies. Over the past 12 months alone, we have seen asset sales from the likes of Vedanta, Tata Motors, Glenmark and Reliance Industries.

Also read: Tata Sons’ firm grip delivers an S&P boost for group companies. Tata Motors’ rating goes up two notches.

From a rating perspective, things are also on the up. Improving industry conditions and broad-based earnings growth, combined with balance-sheet strength and more-entrenched financial discipline, are improving the credit quality of the 30-plus India-based corporates we rate.

Following more than three straight years of net positive rating actions, our rating distribution among Indian corporates has shifted upward. Indeed, among our rated universe across the Asia-Pacific region, India now has the highest proportion of positive outlooks—around one-third of the Indian companies we rate.

Although our positive rating outlook on the Indian sovereign contributes to India’s high positive outlooks relative to other markets, many of the sovereign rating-capped Indian companies we rate also have improving stand-alone credit profiles. 

For example, we upgraded Power Grid’s stand-alone rating to BBB+ from BBB in July 2024. Excluding the sovereign-related outlooks, we have about one-in-six ratings on a positive outlook, which is still high.

Several factors are contributing to our favourable credit view. We forecast aggregate earnings before interest, tax, depreciation and amortization (Ebitda) for rated Indian companies to grow 10% in 2024, driven by telecoms, airports, commodities and chemicals. 

Leverage will decline marginally, even though average capital expenditure is up 30% on pre-pandemic levels while free operating cash flow is increasing and spreading wider.

Also read: Recent tariff hikes will drive higher ARPU for telecom operators, says Centrum Broking

Another plus is that financing access and options have generally been deepening, with strong onshore liquidity and a lack of large debt maturities supporting liquidity profiles. Importantly, most companies have greater headroom over downside rating triggers, which will cushion any earnings disappointments or increased capital expenditure or mergers and acquisitions.

Turning to specific sectors, companies operating in India’s transportation infrastructure space are getting a further boost from traffic growth and tariff increases. Rising cargo volumes are supporting port revenues, while operating efficiencies are supporting stable margins. 

Similarly, airport traffic is rising above pre-covid levels, with higher tariffs improving airport operating cash flow. We expect India’s robust airport traffic will continue to grow 8-15% after surpassing pre-pandemic levels in fiscal 2024, with Ebitda margins normalizing by March 2025. Lower capital expenditure and shareholder focus should also help improve airport credit quality.

For companies operating in the utilities space, rising demand and new capacity will support earnings, alongside moderating fuel costs. Capital expenditure in the sector is increasing, partly due to energy-transition plans. But growing earnings are keeping leverage in check. We expect power demand over 2024-2025 to grow 5-7% in India.

The commodities sector is benefiting from favourable prices, falling input costs and manageable capital expenditure, while companies operating in the telecoms sector are seeing improved average revenue per user (ARPU), rising tariffs and subscriber numbers, and moderating capital expenditure amid significant deleveraging after the 5G auctions in 2023.

Elsewhere, the operating performance and volumes for players in the auto sector have settled after experiencing significant supply chain issues in 2022, while the chemicals sector should see a sharp earnings rebound because of falling input costs and stabilized product prices.

Whatever sector we look at, there are some downside risks to consider. Although we expect policy continuity in India with the elections now past, any unforeseen sector-specific regulatory or government policy changes could have a significant impact on the outlook. 

For example, the recent court ruling on mining taxes in India has the potential to elevate production costs, affecting miners’ profitability and investments. This, in turn, could hurt sectors that consume these materials, such as steel, aluminium, cement, oil and gas, and coal.

Also read: Mint Explainer: Significance of the sole dissenter in the mining tax ruling

Likewise, any significant changes in overall financing conditions may have an impact, especially for those companies with elevated leverage, such as the ones in the renewables sector. 

Although external factors are somewhat mitigated by a strong domestic focus for many Indian companies, rising geopolitical issues, worsening global economic conditions, or weakening commodity prices are other factors to watch for in the near-to-medium term.