Downcycle tapering off, top 100 cos to see 10pc revenue growth

Global credit ratings Standard & Poor's expects top domestic corporates, led by commodity- focused palyers, to grow their revenue 10 per cent annually over the next two fiscal years on the back of their ongoing credit qaulity improvement.

The credit quality of top corporates is stabilising and is likely to improve over the next two years. Though the sectoral differences continue to be significant, the broad trend is toward a recovery, which will lead to a 10 per cent revenue growth over the next two years, S&P said today in a report titled 'Domestic and heavy industrial sectors to take over growth baton'.
 

"We expect the revenue of large domestic corporates to grow around 10 per cent annually in fiscal years ending March 2018 and 2019. Rising demand and moderate inflation will support profitability too," says Abhishek Dangra, a credit analyst with S&P Global Ratings.

The report is based on the analysis of top 100 companies based on market capitalisation.

The report notes that growth trends are reversing, with commodity-focused sectors set to outpace export-focused industries like IT and pharma. Improvement in heavy industries is also likely to be more pronounced, while asset-light industries will face headwinds.

"In our view, stronger operating leverage from higher revenue growth, a better cost position, and benign commodity prices will support improved profitability for top companies," Dangra says, adding, "We expect the oil and gas sector to maintain its vastly improved EBITDA margins, while telcos are likely to see a compression in margins due to intense competition."

The report further notes that the key for deleveraging is to keep the debt levels under check through low capex as demand is still elusive.

"We expect the ratio of debt to EBITDA for the top 100 companies to trend toward 2x in 2019, from a peak of 2.7x in 2016. We estimate EBITDA interest coverage to be healthy at about 5x for these corporates," he says, but warned that heavy capex amid aggressive competition and elusive growth can derail credit qauliyt improvements.

"We expect increasing consolidation in domestic focused sectors, asset sales in infrastructure and power utilities, and outbound acquisitions in export-focused sectors over the next two years," says Dangra.

Most companies will exercise financial discipline when looking at these opportunities without any significant impact on their financial health, he added.