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Announcement:

Moody's and ICRA: Domestic growth will support credit profiles of Indian corporates; stable outlook for power sector but mixed results for UDAY

07 Jun 2018

Singapore, June 07, 2018 -- Moody's Investors Service says that credit quality of Indian non-financial corporates (NFC) will remain supported by a robust growth outlook for the domestic economy and a benign outlook for global economic growth. Moody's Indian affiliate, ICRA Limited, says the non-infra corporate sector has seen some revival in growth and margin expansion over last 2-3 quarters.

Moody's has a stable outlook on the power sector. However, ICRA believes that the reforms for the Distribution Utilities (DISCOMs) -- UDAY (Ujwal DISCOM Assurance Yojana) has seen mixed success.

"As disruptions from GST implementation fades, economic activity will recover in India. GDP growth of 7.3% for 2018 in India will result in higher domestic sales volumes, which along with new production capacity and supportive commodity prices will support EBITDA growth for corporates over the next 12 to 18 months," says Vikas Halan, a Senior Vice President in Moody's Corporate Finance Group.

However, Moody's believes that many rated Indian non-financial corporates, given their international revenue base, remain exposed to increasing protectionism and tighter monetary policy in the US. Rupee exchange rate, which has depreciated nearly 6% this year, pose challenges for companies with unhedged foreign currency exposure and opportunities for exporters and IT/BPO companies.

Moody's points out that refinancing needs in 2018 are manageable for most corporates given their access to capital markets and large cash balances. However, ongoing volatility in the international bond markets could make refinancing challenging, particularly for high-yield corporates. Further, domestic bank funding availability could weaken as the banking system struggles with fresh asset quality and governance issues.

According to Moody's, credit quality of state owned oil & gas companies will remain subject to government's policy response to increasing oil prices. Oil marketing companies have been paying high dividends to the government, which if not reduced in line with the earnings will be credit negative. Credit metrics of state owned upstream companies to remain well positioned for their respective ratings as long as their net realized prices do not fall below $50 per barrel.

Moody's believes that profitability will continue to remain under pressure in the telecom sector as competition remains intense despite significant consolidation. Capital spending will remain high for the telecom operators as they expand and upgrade their network to service the exponential increase in high speed wireless data consumption in India.

According to ICRA, there's been a revival and margin expansion in automobile, consumer staples, durables and hospitality which have been experiencing rising consumer demand.

"Rural demand, which has seen a recent pick-up, would be critically dependent on normal monsoon, hike in MSPs and overall thrust on agri-economy ahead of elections. Pick-up in the affordable, rural housing segments and infrastructure, primarily road and irrigation projects, is likely to support demand growth in core sectors like cement/ steel," says Subrata Ray, Senior Group Vice President at ICRA Limited.

ICRA believes that going forward the corporate sector would also see impact of growing formalisation and tightening regulatory norms -- e.g., RERA for real estate, leading to gradual industry consolidation and emission norms across automobile industry -- leading to significant investments on product developments.

According to ICRA, capex requirements, which have been modest over last several quarters, considering unutilised capacity across segments, may gradually pick-up as the slack gets fully absorbed. However rising commodity prices would cause margin pressures. This, coupled with rising inflation, remain a potential challenge to the credit outlook.

Moody's has a stable outlook on the power sector which reflects an improvement in domestic coal availability moderating the fuel supply risk. Moody's also says that while distribution utilities have seen an improvement in their liquidity, the extent to which operational efficiency has improved is still unclear.

Moody's believes India is taking steps to align its power generation mix towards its nationally determined contribution (NDC) commitments under the Paris accord signed in December 2015. Renewable Energy's (RE) share in new capacity additions has been around 60% for last two years while on the other hand the coal based additions have seen a sharp slowdown.

"India's focus on greening its energy mix would imply strong growth for renewable energy over next many years," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst

Nevertheless, Moody's says that this growth will be accompanied by key challenges for renewable energy projects, notably weak offtaker credit quality and an evolving regulatory framework.

Moreover, the recent round of biddings in the case of solar projects have seen a sharp drop in the quoted tariffs, and the ability of such projects to achieve financial closure, given the concerns over the fact that the long-term viability of projects at such tariffs remains to be seen.

Moody's also points out that India's highways sector is experiencing an increase in the pace of PPP project awards thanks to government supportive initiatives to modify existing PPP procurement models to attract more private-sector investment. This positive trend for PPP highway projects has been limited in other infrastructure sectors, but regulatory developments in India's port and metro rail sectors may stimulate more PPPs in these sectors as well.

"The reforms for the Distribution Utilities (DISCOMs) -- UDAY (Ujwal DISCOM Assurance Yojana) has seen mixed success. A total of Rs. 2321 billion of debt has been refinanced under the UDAY scheme so far, which has greatly aided both the financial and liquidity position of the DISCOMs, with estimated interest cost savings of Rs. 120 billion in FY2017," says Anjan Ghosh, Executive Vice-President & Chief Rating Officer, ICRA Limited. It may however be noted that some of the State Governments have in turn lent the same amount as State Government loan, which dilutes the beneficial impact to some extent. Nonetheless, these loans will be subsequently converted to grant over the next three-year period and the full interest savings benefit can be seen in FY2021. More importantly, however, the progress on achieving the operational efficiency improvement has a lot of ground to cover. As against the target AT&C losses of 15% that all utilities are supposed to achieve by FY2019-FY2020, data available shows that some of the states, including large ones like Bihar, Rajasthan, Uttar Pradesh and Madhya Pradesh have much higher loss levels, in the range of 25-36%. The sustainable improvement in financial position of the discoms remains dependent on improvement in operating efficiencies and reducing the gap between tariff and cost of supply.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Vikas Halan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Abhishek Tyagi
Vice President - Senior Analyst
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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