Corporate deleveraging to remain slow in FY18: Report

Even as "moderate" recovery is expected in corporate profitability, deleveraging will remain slow in the current financial year, said a report.
As per the report by India Ratings & Research (Ind- Ra), corporates with large refinancing requirements are likely to face severe challenges in refinancing their borrowings during the fiscal. This is because the balance sheets of mid-sized public sector banks are stretched due to high NPA (non-performing assets) levels.
The rating agency observed that a potential rise in global protectionism remains one of the most likely risks that could delay recovery in earnings and consequently credit profiles of corporates.

"We do not expect a meaningful deleveraging of corporate borrowers in 2017-18. Broader macroeconomic indicators suggest improving demand conditions.
"However, the recovery in the operating profitability levels of Indian corporates is likely to be moderate in the current fiscal," the report said.
"Although we expect a moderate recovery in profits in 2017-18, corporates with large refinancing requirements are likely to face severe challenges in refinancing their borrowings, as the balance sheets of mid-sized PSU banks are stretched due to high NPA levels."

Ind-Ra said corporates operating in consumption and export oriented industries would exhibit a moderate improvement in their credit profiles, while those in investment-oriented sectors are unlikely to meaningfully improve in the near term.

"Although better demand conditions will support an improvement in manufacturing activity, service sector corporates will continue to outperform manufacturing sector corporates."
The agency expects EBITDA (Earnings before interest, tax, depreciation and amortisation) levels of corporate borrowers to grow at an average rate 6-8 per cent in 2017-18 compared to 3-5 per cent for 2016-17 and 6.4 per cent in 2015-16.
"Despite improving demand conditions, corporates in sectors such as infrastructure, telecommunications, and iron and steel are unlikely to exhibit major improvements in operating profitability," the report said.
"Ironically, sectors where corporates have a relatively better credit profile are likely to register better improvement compared with sectors where entities have a highly stressed credit profile.

"As a result, the recovery in the overall credit quality of India Inc will remain limited," it added.