Moody's: India's pro-cyclical industries to benefit from improving credit conditions through 2016

Moody's Investors Service says that credit conditions should improve for Moody's-rated non-financial corporates and infrastructure debt issuers in pro-cyclical industries in India over the next 12-18 months. The improvement will be due to an upturn in economic growth, a gradual pass-through of interest rate cuts, weakness in international commodity prices, and the government's pro-growth policy agenda.

"Credit conditions in industries that are most directly correlated to India's domestic economic cycle, such as industrials, transport infrastructure, metals and automotives should improve the most," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst.

"However, issuers in the upstream oil and gas, and chemicals sectors will see their earnings and cash flows pressured by weak oil prices globally," says Kaustubh Chaubal, a Moody's Vice President and Senior Analyst.

Moody's report points out that the latest economic data suggests that a gradual pick-up in economic activity is likely in India and that a number of stubborn macroeconomic challenges, such as inflation and the current account balance, have also eased significantly.

The reduction in both the country's headline inflation rate and current account deficit provides a more stable backdrop for Indian corporates in terms of operating margins, market borrowing costs and the exchange rate.

As for government policies, Moody's report says that monetary easing will reduce borrowing costs for companies and stimulate consumer demand for domestic-focused industries. However, the banks are unlikely to pass on fully any policy rate cuts to borrowers. The banks will also likely maintain a more conservative approach to fresh lending in sectors where asset quality remains a risk.

Moody's report notes that the Indian government's recent policy agenda including diesel price deregulation, the lifting of the iron ore mining ban, the Coal Mines Special Provisions Bill and the Mines & Minerals Development and Regulation Bill will benefit refining, metals, steel and power companies. Other sectors have yet to see a specific boost from government policy, but will likely to benefit from the government's pro-growth agenda.

As for the weak commodity prices globally, Moody's report says the low prices will lower operating costs for sectors such as automotives, manufacturing, infrastructure and power, but will weigh on upstream oil and gas, and chemical companies.

On leverage, Moody's report says that debt levels are in general stabilizing for Moody's-rated Indian corporate and infrastructure issuers, as their earnings rebound and margins recover.

However, the report also points out that structural challenges persist. In particular, the government's ability to push through the Land Acquisition Bill and a unified goods and services tax will be crucial in maintaining positive policy momentum.

Meanwhile, several industries will continue to wrestle with structural challenges, even as cyclical conditions stabilize or improve. Such challenges include oversupply in the real estate market and weak finances among state electricity boards.

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