US tariffs: Fitch cautions rising second-order risks may hit India Inc

HPCL-Mittal Energy more vulnerable to Russia-linked tariffs

Global rating agency Fitch on Tuesday said Indian companies in sectors such as pharmaceuticals may be hit by further US tariff announcements, while cautioning about the rising risk of second-order effects from existing tariffs to India Inc.

 

India-based corporations generally have low direct exposure to US tariffs, but sectors that are currently unaffected, including pharmaceuticals, could be hit by further US tariff announcements. A US-India trade deal, if secured, would reduce these risks, the agency said in a statement.

 

The United States (US) imposed 25 per cent reciprocal tariffs on India with effect from August 7 and an additional 25 per cent in connection with its oil imports from Russia, effective August 27. The US delegation was slated to visit India next week for negotiations on a trade deal, but it has been postponed without any announcement on new dates.

 

The US is a key export destination for Indian pharmaceutical companies. Biosimilars-focused Biocon Biologics Limited derives around 40 per cent of its sales from the US, mostly from production sites in India and Malaysia.

 

Significant US tariffs on pharmaceutical products are not yet factored into the rating base case and could pose downside risks to its operating performance. The competitive industry landscape could limit Biocon’s ability to pass on higher costs, despite the non-discretionary demand for its products, it added.

 

Referring to the tariffs slapped for Russian oil imports, Fitch said Russian crude accounts for about 30-40 per cent of crude imports for Indian oil marketing companies (OMCs), with its discounted price supporting their earnings before interest, taxes, depreciation, and amortisation (Ebitda) and profitability. Our base case is that the Indian government will not limit purchases of Russian crude by oil marketing companies. If these were curtailed, it would hurt OMCs’ Ebitda, but we estimate that the Ebitda impact would be around 10 per cent in the case of a full halt.

 

The support-driven OMCs’ Issuer Default Ratings, such as those of Bharat Petroleum, Indian Oil, and Hindustan Petroleum would be unaffected under this scenario. HPCL-Mittal Energy Ltd, however, has a lower rating buffer and its credit profile could be more vulnerable to a sharp deterioration in earnings that could hinder its deleveraging prospects, Fitch said.

 

India’s direct automotive exports to the US, including parts, are limited. The US accounts for close to 20 per cent of sales for auto supplier Samvardhana Motherson International Ltd (SAMIL), but mostly from production bases in the US, or those in Mexico that benefit from tariff exemptions under the United States-Mexico-Canada Agreement. Fitch had revised the outlook for SAMIL to ‘stable’ from ‘positive’ in May, reflecting the agency’s expectation that a weakened global auto sector outlook amid tariff-related uncertainty would limit further improvement in SAMIL's financial leverage, it added.