India Inc's credit quality to improve further, says S&P Global Ratings

Declining leverage, broad-based earnings growth drive profile

Credit quality and financial profile of Indian rated companies are expected to improve further on the back of declining leverage and broad-based earnings growth, according to S&P Global Ratings.

Leverage will decline marginally even though average capital expenditure is up 30 per cent on pre-pandemic levels. The absolute debt reduced more in non-infrastructure sectors. Not much debt reduction was witnessed in infrastructure entities due to higher capex, including energy transition initiatives.

Debt levels will decline modestly while earnings growth drives leverage lower. Aggregate Ebitda is set to grow at 10 per cent in 2024, driven by telecoms, airports, commodities, and chemicals, according to the agency's report "India Corporate And Infrastructure Ratings: The Momentum Is Positive”.

“We have positive rating outlooks on a third of the Indian companies we rate,” the report said. It has ratings on 18 Indian corporates, including Reliance Industries, Vedanta Resources, NTPC, and Tata Motors.

"Our positive outlook on the Indian sovereign contributes to India's high positive outlooks relative to other markets," said S&P Global Ratings’ credit analyst Neel Gopalakrishnan in a statement.

On May 29, S&P had revised outlook on India’s sovereign rating (BBB-/A-3) to “Positive” from “Stable”. The positive outlook reflected the view that continued policy stability, deepening economic reforms, and high infrastructure investment will sustain long-term growth prospects. That, along with cautious fiscal and monetary policy that diminishes the government's elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months.

Importantly, many of these credits also have improving standalone credit profiles.

Companies have greater headroom over downside rating triggers, which will cushion earnings disappointments or increased capital expenditure or mergers and acquisitions. The exceptions to this trend include companies in sectors such as renewables.

Referring to the fundraising ecosystem, S&P Global said the financing access and options have generally been deepening. Indian companies have ample liquidity options. Strong onshore liquidity and lack of large debt maturities support liquidity profiles. They have established resilience to foreign exchange risks and interest rate volatility.

While overall economic and ecosystem conditions were expected to be positive, the agency also flagged some caution about regulatory and business environments.

The biggest downside risks would likely come from unforeseen sector-specific regulatory or government policy changes. For example, mining taxes or reduced infrastructure spend are hard to predict but could have large effects.

On the risks from worsening global economic conditions, it said the secondary effects such as commodity prices could weaken some earnings profiles. External factors are somewhat mitigated by a domestic focus for many rated Indian companies, S&P Global added.