Singapore, June 08, 2017 -- Moody's Investors Service says that its stable outlook for non-financial
corporates in India (rated Baa3 positive by Moody's) over the next 12-18
months reflects in large part the country's sustained economic growth.
Moody's Indian affiliate, ICRA Limited, says a revival
in consumption demand, lower input costs and structural reforms
will support a gradual recovery in the corporate sector.
Moody's has a stable outlook for the power sector while ICRA believes
that the government is likely to continue to rely more on public investments
for development of infrastructure in the next 12-18 months as high
leverage will keep private sector appetite limited.
"Almost 23% of all non-financial corporates that Moody's
rates in India carry positive outlooks and 53% percent carry stable
outlooks," says Kaustubh Chaubal, a Vice President and Senior
Analyst in Moody's Corporate Finance Group.
While downgrades in recent months continue to exceed upgrades, Moody's
expects that the negative rating actions have bottomed out, with
23% of the rated portfolio on negative bias, down from 34%
in June 2016.
Moody's believes that its high single-digit GDP growth forecast
for India of 7.5% for fiscal year 2017 and 7.7%
for fiscal year 2018, capacity additions and stabilizing commodity
prices, will support EBITDA growth of 6%-12%
for corporates over the next 12-18 months.
Moody's also points out that the capital expenditure cycle for Indian
corporates has peaked, because projects have neared completion,
and declining investments should slow the pace of borrowing over the next
12-18 months. Moreover, refinancing needs are manageable
for most corporates in 2017, given their better access to the capital
markets and large cash balances.
Moody's notes that cross-border bond issuances aggregating
$7.2 billion since January 2017 registered a 200%
growth over the same period last year, and totaled almost 74%
of the cross-border bond issuance from India in 2016. Bond
market liquidity, the appetite for diversification through exposure
to emerging markets, and the hunt for higher yields prompted investor
interest. At the same time, Moody's expects issuers
to continue to tap the cross-border bond markets, while focusing
on diversifying funding sources and raising cheaper financing.
Specifically for metals and mining (ferrous and non-ferrous),
stabilizing commodity prices, completion of capital expenditure
and as a result, expected increase in production capacity will drive
earnings expansion. That said, Moody's cautions that
the large number of stressed assets in the sector could prompt aggressively
debt-financed acquisitions -- which will weigh on ratings.
Besides, our negative outlook on the steel industry largely reflects
the regional steel overcapacity.
As for the auto sector, Moody's says that its outlook for the industry
is stable, because companies in this industry should benefit from
improving customer sentiment, likely new product launches,
as well as likely falling vehicle prices, given that the implementation
of the goods and services tax (GST) will replace a web of taxes.
Moody's maintains a negative outlook on the telecommunications industry,
reflecting Moody's view that earnings will come under pressure because
heightened competition will persist over the next 12 months. In
particular, Moody's says that new entrants will take an aggressive
approach towards acquiring new subscribers, and growing the data
market.
Moreover, the expensive spectrum auctions over the past few years
have resulted in a highly leveraged financial profile for most operators
and weigh on Moody's outlook on the industry. Nevertheless,
Moody's points out that intensified competition could prompt further
consolidation in the sector.
Moody's maintains a stable outlook on the pharmaceutical industry,
largely because of the sector's underleveraged balance sheets.
However, acute competitive pressure on the pricing of generic products
in the US — the largest and most lucrative market globally,
but also extremely competitive — will weigh on earnings and profitability.
At the same time, regulatory and US Food and Drug Administration
compliance risks remain a key sensitivity for the sector as a whole.
ICRA believes that the recovery of consumption demand, benefits
of lower input costs and structural reforms will support a gradual recovery
in the performance of the corporate sector.
"While the upcoming implementation of the GST will likely result
in short-term disruptions, in the longer term, it would
benefit the corporate sector through greater efficiencies in the supply
chain and the formalization of the unorganized sector," says
Subrata Ray, a Senior Group Vice President at ICRA. "And,
a normal monsoon would be a key driver in sustaining the recovery in rural
demand."
ICRA's credit outlook on key consumption driven segments like automotive,
tractors, FMGC are stable. While the balance sheets are relatively
leveraged, the pricing power is gradually returning in most markets
for the hotel industry with moderating supply additions.
On the power sector in particular, Moody's stable outlook for the
sector reflects the improvement in domestic coal production, which
moderates the fuel supply risk. Moody's also says that the Indian
government's debt restructuring of the financially weak distribution utilities
— under the implementation of the Ujwal Discom Assurance Yojana
(UDAY) — will likely improve the companies' financial capacity to
make timely payments to power generators.
While distribution utilities — with debt restructured under the
UDAY scheme — have seen their losses falling because of the significant
reduction in interest costs, the extent to which operational efficiency
has improved is still unclear.
"The capacity utilization of Indian power generators will likely be limited
by the significant increase in new generation capacity over the last few
years, and relatively weak electricity demand," says Abhishek
Tyagi, a Moody's Vice President and Senior Analyst.
The Indian renewable energy market will likely see strong growth over
many years, as India focuses on greening its energy mix, in
line with commitments under the Paris agreement signed in December 2015.
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, as well as
financing and execution risks. 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.
ICRA believes the government is likely to continue to rely more on public
investments for development of infrastructure over next 12-18 months
as private sector appetite remains limited due to high leverage levels.
"Companies in the highway sector in particular are likely to benefit
from higher project awards and a faster pace of execution, because
of a host of policy initiatives, including faster clearances and
improvements in the project award framework," says Anjan Ghosh,
Executive Vice President and Chief Rating Officer, ICRA.
ICRA notes that there has been a substantial increase in the award and
execution of road sector projects, although such developments fall
short of the government targets set at the beginning of the year.
Encouragingly, projects awarded under the Hybrid Annuity Model,
after initial delays, have also started achieving financial closure,
although concerns remain. And, existing road developers are
benefiting from an improvement in the economics of the projects,
because of a general uptick in economic activity — which translates
into higher traffic growth — and newer funding options such as InvITs
becoming a reality.
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
