Demand slowdown the biggest worry for India Inc

CRISIL report says two of every three sectors would record lower revenue growth; forex vulnerability is the least severe of stress factors

This financial year, India Inc would face several stress factors, the most significant being a slowdown in demand. One in four companies would see a demand slowdown, while two out of every three sectors of the economy would record lower revenue growth, according to CRISIL’s ‘State of the Nation’ report, released on Tuesday.

Industry and services, which together account for 86 per cent of gross domestic product (GDP), would grow at a slower pace than last year. Roopa Kudva, managing director and chief executive, CRISIL, said, “The biggest stress for companies is slowing demand, and this would hit revenue growth of companies.”

Despite a significant depreciation in the rupee, foreign exchange vulnerability is the least of the stress factors impacting the credit profiles of 2,481 firms rated ‘investment’ grade by CRISIL. The rating agency said the rupee would remain weak compared to last financial year. However, only six per cent of companies are highly vulnerable to foreign currency volatility. Besides, foreign exchange debt is concentrated among a few companies — one per cent of firms account for 85 per cent of the total foreign exchange exposure. (CRISIL ESTIMATES)

Though this defies conventional wisdom, the rating agency says its study doesn’t include firms such as Essar, GMR, GVK, JSW and Videocon, which are significant foreign exchange borrowers but which CRISIL doesn’t rate.

Stretched working capital cycles are aggravating liquidity pressures for one in six companies. The slowing economy had led to accumulation of inventory and receivables, resulting in liquidity stress, the report said, adding this had engendered refinancing pressures for firms whose net cash accruals were likely to be insufficient to service debt repayments for a fifth of the large-sized firms. Large firms with operating incomes exceeding Rs 1,000 crore are particularly vulnerable. These large firms also have higher debt levels, increasing stress on financing costs.

On the macro front, a well-distributed monsoon and an increase in kharif sowing area would result in agriculture surprising on the upside. CRISIL expects farm GDP to more-than-double from last year’s 1.9 per cent to 4.5 per cent. This would help check food prices and support consumption in rural areas. Kudva says, “If agricultural growth exceeds six per cent, which we have seen in the past, GDP growth could be much better, at 5.2 per cent, compared to our expectation of 4.8 per cent.”

Sales of tractors and two-wheelers are likely to improve, owing to a rising rural economy. The telecom segment, in which pricing intensity is on the decline, is expected to gain on higher revenues per user.

Export-linked sectors such as information technology, pharma, textiles, ready-made garments and cotton-yarn spinning would fare well due to the rupee’s depreciation.

“There's a boost for export-linked sectors from the weak rupee. Growth in America is getting firmer,” Kudva said.

The government’s current account deficit is expected to decline to 3.9 per cent, but the currency is expected to remain weak compared to last financial year. CRISIL expects this would put pressure on inflation, fiscal deficit and companies’ input costs.

The economy’s growth isn’t expected to decline further; it is likely to trace an L-shaped trajectory through this financial year, unlike the V-shaped recovery after the Lehman crisis.