‘Demand revival is certain, will support corporate earnings’

Surabhi Mumbai | Updated on October 04, 2021

The majority of the sectors are coming back to pre-pandemic levels, says Somasekhar Vemuri, Senior Director, Crisil Ratings

“We have a positive outlook on credit quality trend in the second half of the fiscal, though there will be some pockets of stress,” said Somasekhar Vemuri, Senior Director, Crisil Ratings. In an interview with BusinessLine, he said that demand revival will support corporate earnings and corporate credit demand is also slowly inching back. Edited excerpts:

Have companies recovered from the impact of the pandemic?

Industrial output is increasing, and data depicts the pre-pandemic level of growth. GDP growth is expected around 9.5 per cent this fiscal. But we need to keep in mind that this is on the back of a negative economic growth rate. The return to growth doesn’t mean that all sectors are doing well. The majority of the sectors are seeing growth and things seem to be coming back to pre-pandemic levels but there are companies, especially those dependent on travel, tourism, contact intensive sectors, that are far away from pre-pandemic levels, and when will they turn around is difficult to forecast.

We have highlighted that while bigger companies who had the capability to adapt to nimbler ways of working and adapt to the new normal could offset the impact of the pandemic but the same is not true for SMEs and the lower-income borrowers in MFI and unsecured loans. There continue to be pockets of struggle.

In terms of the economy is the worst behind us and how do you foresee the impact of a possible third wave?

We are not in a position to predict the third wave or its severity. The first wave was unprecedented with a very stringent lockdown. The second wave recorded a lot more deaths and led to tremendous pressure on the healthcare system. But a variety of lessons were learned, including that there doesn’t need to be a very stringent lockdown but it can be more localised. There was some impact on the economy but not as sharp as the first wave. Also, at the beginning of the second wave, the vaccination programme had just started. Now there is a good pick up in the pace of vaccination, which should come in handy. We will be better prepared to tackle the third wave and the restrictions will be less stringent and more localised in nature. The impact on the economic activity may not be as harsh as the first wave but probably closer to the second wave.

What is your expectation on corporate earnings?

We expect the positive trends. Demand revival is certain at this juncture which would be supportive of earnings across companies. The only caveat is the high commodity prices and freight costs. Some industries will have the ability to pass it on seamlessly without impacting demand while some others will probably have either competitive intensity that will prevent them from passing it fully or alternatively, which will impact the demand.

Do you expect a revival in corporate credit demand?

Our call is that we will likely see credit growth of about 9-10 per cent at an overall level and the corporate segment, which is roughly half of overall credit, will see a mid-single-digit kind of growth of about 5 per cent. There will be working capital demand and also demand from infrastructure projects due to the government push in the sector. Third, some of the companies in sectors like metals and steel are announcing capex so there will be some degree of demand from there. It is not broad-based but, in a few pockets, we do see demand coming back.

Are NPAs a concern for banks?

In the last four to five years, there has been a good amount of clean-up on the corporate side. A lot of the bad assets have been weeded out from the system. Covid may create a few large exposures that may be hit but those are where the fundamental viability is not the question and there will be some resolution plans to revive them. But the legacy stress from some of the larger corporate segments is behind us. Covid clearly had an impact on MSME and retail and there we will see pressure build-up and some NPA coming up.

Published on October 04, 2021

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