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
