Singapore, December 14, 2017 -- Moody's Investors Service has a stable outlook for non-financial
corporates in India (rated Baa2 stable by Moody's), except
for telecoms, which has a negative outlook.
Moody's Indian affiliate ICRA has stable outlooks on the passenger
vehicle, construction, cement, and textiles sectors,
but a negative outlook on real estate.
"Our stable outlook is underpinned by the expectation that GDP growth
of around 7.6% will result in higher sales volumes,
which along with new production capacity and stabilizing commodity prices,
will support EBITDA growth of 5%-6% over the next
12-18 months," says Laura Acres, Managing Director
at Moody's Corporate Finance Group.
"Further simplification of the Goods and Services Tax (GST) and
other structural reforms or improved commodity prices could result in
higher EBITDA growth, and provide means for deleveraging for some
corporates," adds Acres.
Moody's has a stable outlook for exploration & production companies,
reflecting expectations of stable production volumes, low subsidy
burdens and stable oil prices.
For refining & marketing, Moody's stable outlook is based on
the consideration that capacity additions and higher refining margins
will increase earnings, even as marketing margins stay stable.
While high dividend payments remain a concern, Moody's says
that if the GST net is widened to petroleum products, it would be
a credit positive for the sector.
Moody's maintains a stable outlook for base metals with improved
fundamentals and supply deficits in certain metals supporting stable prices
over the next 12-18 months. Moody's expects base metal
pricing premiums to narrow, although higher production from capacity
additions and cost rationalization measures will drive earnings expansion.
Moody's also expects India's steel consumption to grow in
the mid-single digits over the next 12-18 months,
lower than India's GDP growth of 7.6%, supporting
a stable outlook. Consolidation will also rise in the steel sector.
Moody's stable outlook on IT services incorporates the expectation
that Indian companies will remain in the forefront in offering IT services
to the Western economies, weighed against some of the global challenges,
especially in terms of H1B visas and the fast-pace of technology
change that will require investments or acquisitions.
The only sector where Moody's has a negative outlook for India is
telecoms, where intense competition and heavy debt loads continue
to pressure cash flows, ultimately driving consolidation activity
towards a three player market.
"ICRA believes the outlook for the passenger vehicle industry remains
stable. While demand over the near and medium term is expected
to remain robust at 9-11%, supported by favorable
demographics, rising competition will limit pricing power,"
says Anjan Ghosh, Chief Rating Officer for ICRA Limited.
The spend on product development, including for tightening emission
norms, especially for diesel OEMs, will drive a significant
part of capex (INR250-300 billion) over the next 2-3 years.
And for the next 4-5 years, the industry faces potentially
significant disruption from electric vehicles, although the pace
of adoption depends on government policy. While many OEMs are preparing
for electric vehicles, the transition period may see significant
disruptions in industry dynamics.
"ICRA's outlook for the real estate sector remains negative over
the near to medium term. The sector continues to face demand headwinds
owing to elevated property prices, a subdued business environment,
and regulatory developments such as the Real Estate Regulation & Development
Act (RERA) and GST. This -- coupled with execution
delays -- has dampened consumer confidence, resulting
in deferred purchase decisions," says Ghosh.
The supply side has seen a reduction in new project launches owing to
the regulatory developments as well as slow sales. Developers are
likely to focus on completing current projects and reducing unsold inventory,
which along with the moderation in new launches, can reduce the
supply overhang over the medium term.
ICRA expects the sector to consolidate with larger developers to benefit
in the long run, given the tighter compliance and transparency requirements.
New orders in the construction sector are expected to remain healthy over
the next 2-3 years, supported by huge spending on roads,
railways, urban infrastructure, and affordable housing .
The healthy order book -- along with an easing in the approval
process -- is expected to a support ramp-up in execution
pace and result in higher growth in operating income for the construction
companies over the medium term.
Operating profitability is also expected to improve with the benefits
of increased scale of execution, although this would also be sensitive
to any steep rise in raw material and labor prices. Borrowing levels
are expected to increase marginally to support working capital requirements
with the greater scale of operations.
On the other hand, asset monetization could help lower borrowing.
Interest cover will gradually improve over the next few years; however,
meaningful improvements in debt metrics would depend on asset monetization
plans.
The outlook on the cement sector remains stable. Cement off-take
remained weak in H1 FY2018, reporting decline of 2%,
due to subdued real estate activity, a sand shortage and transitional
issues related to implementation of structural reforms, like the
Real Estate Regulatory Authority Bill and GST.
Based on current trends, ICRA expects demand to recover from Q4F
Y2018 onwards, reporting growth of ~1% in FY2018.
Expected incremental demand from the affordable housing segment,
along with increases in infrastructure spend, are the key drivers
for the industry in medium term.
ICRA expects demand growth to improve to ~4%-5% in
FY2019 and to ~6%-8% in FY2020-FY2021.
However, new project announcements from the private sector remain
weak and the revival of public-private partnerships is crucial
to improve the pace of infrastructure development.
ICRA expects the credit profiles of domestic textile companies to remain
stable. During the last 3-4 quarters, the industry
witnessed multiple headwinds owing to demonetization, the transition
to GST, adverse currency movements, reductions in export incentives,
sustained declines in yarn demand from China, and rises in cotton
prices which exerted pressure growth and profitability.
The sector's credit profile however demonstrated resilience,
supported by declining aggregate debt, as the industry decreased
debt-funded expansions. Favorable developments in the current
year, especially an easing in cotton prices and an accommodative
stance on GST/ export incentives, are expected to subside growth
and profitability pressures for the sector further, cushioning the
impact on credit profiles.
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.
Kaustubh Chaubal
Vice President - Senior Analyst
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
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
