Russia-Ukraine war: Rs 1.2 trn SME debt at risk, lower-rated unit worse off

India ratings says effects manageable; pharma, Fertiliser sector more exposed

The direct impact of the Russia-Ukraine war on Indian business would be largely restricted to small entities with low ratings and would be manageable. The effect on credit will be more pronounced in a few sectors such as pharma and subsidy-linked industries like fertilisers, according to India Ratings.

As for the indirect impact of war on credit, rating agency said the analysis of top 1,400 corporate entities (excluding oil and financial entities) as per total debt, is expected to be limited-to-moderate.

The median EBITDA margins could be impacted by 100-200 bps for commodity-consuming sectors in a scenario of commodity prices sustain at the current levels, rupee depreciates by 10 per cent and an increase in the borrowing costs by one per cent.

The debt at risk (with net leverage exceeding 5x) would exceed by Rs 1.2 trillion compared to what was anticipated prior to the war, or under steady state condition.  The agency is reviewing its portfolio of entities and will communicate rating actions wherever appropriate.

Pharma has meaningful exports to the countries in the Commonwealth of Independent States which coupled with the ongoing pressure on generic pricing in the US could impact the profitability of some companies.

Wtih respect to credit, given these entities have low leverage on their balance sheets, risk is expected to be minimal. Increasing business risks in the event of a prolonged disruption could impact credits.

Higher food, fertilisers and oil prices are likely to put pressure on the subsidy allocation by the Indian government for fertilisers and LPG. If the government were to refrain from increasing the fertiliser subsidy, the deficit would need to be funded by the balance sheet of fertiliser companies, thus deteriorating their credit metrics. The credit impact on fertiliser companies is assessed to be manageable, given their low leverage, it said.

India Ratings said that the increase in commodity prices could result in a stretched working capital cycle for small and medium enterprises (SMEs), weakening debt servicing ability. Additionally, any material rise in interest rates could increase the EMI burden on borrowers.

The non-banking financial institutions have adequately provided towards standard and delinquent assets and also have capital buffers to absorb a rise in credit cost. It does not expect a substantial impact on their capital buffers, provided the crisis is not prolonged, it added.