12 Indian firms at higher risk of downgrade amid rising inflation: Fitch

The prospects of prolonged inflation and slower economic growth in the world are rising, and they expose 12 Indian corporations -- eight public sector entities (all in energy and utilities) and four private sector firms -- to “elevated” downgrade risks, according to Fitch Rating.

India's sovereign rating shall play a prominent role in determining whether such risk crystallises for 12 of these India-based companies. These eight PSUs facing elevated downgrade risks are Indian Oil, Hindustan Petroleum, Bharat Petroleum, GAIL, ONGC, Oil India, NTPC, and Powergrid.

The four non-government linked issuers on negative outlook are Bharti Airtel, Summit Digitel Infrastructure, Adani Transmission, and UltraTech Cement. They are not constrained directly by India’s rating but would be downgraded if India's country ceiling is lowered to 'BB+'.

The stagflation -- prolonged inflation and slower growth -- risks are rising, with added supply-chain risk from sanctions on Russia, China’s pandemic-linked lockdowns, and tighter labour market conditions. The severity of labour shortages varies across Asia Pacific economies, with, for example, Australia being more exposed to wage inflation than China and Indonesia.

The Indian utilities and oil & gas sectors, along with Chinese homebuilding, stand out with a high proportion of corporates assessed with a ‘low’ rating headroom.

Fitch said 'low' headroom conveys that leverage is already near or higher than the negative sensitivity, or other important parameters, such as profitability and free cash-flow generation were weak for the rating level. This is typically the case for those already on a negative outlook or rating watch negative.

Under the stagflation scenario, the rating agency assumes the surge in global oil prices lasts over a longer period with average annual prices of $150/bbl in 2022 and $130/bbl in 2023. Its current baseline assumptions are 100/bbl and $80/bbl (for Brent), respectively. This compares with the average of $71/bbl in 2021.

Also, headline inflation continues to rise. Other commodities -- notably wheat and aluminium -- see their prices staying at historically high levels amid the Russia-Ukraine conflict.

High global oil prices weaken household incomes and consumer spending, particularly for lower-income households which spend a larger share of income on food and energy costs, the rating agency added.