The financial strength of Indian corporates will get tested against multiple macroeconomic shocks - commodity inflation, tightening monetary policy and weak rupee - in FY23, with their risky debt likely to increase by ₹60,000 crore, according to India Ratings and Research (Ind-Ra).
In the post-war case, out of ₹25.2 lakh crore debt, Ind-Ra expects ₹6.9 lakh crore to be with weak entities (with net leverage exceeding 5 times), taking into account (1) impact of buoyant commodity prices, (2) 1 per cent increase in the interest rates and (3) weakening rupee by 10 per cent. It could be ₹6.3 lakh crore in a pre-war case.
The agency analysed the top 1,385 corporates by estimating the change in their FY23 debt protection metrics in a post-war (Russia-Ukraine) scenario and pre-war scenario.
While Ind-Ra expects large entities to show resilience on account of healthy balance sheets, easy access to financing and pricing power, small and medium entities could face headwinds due to buoyant commodity prices and firming interest rates.
“Commodity producer corporates could witness their balance sheets strengthening moderately on account of higher commodity prices and deleveraging. Commodity consumers however could find higher commodity prices affecting their profitability,” the agency said in a note.
Favourable financing condition
From a financing point of view, the agency opined that the banking sector’s improved appetite, owing to improving balance sheet and a rising demand from bond investors, will be conducive for financing in FY23.
Higher commodity prices tend to increase the working capital requirements for corporates. The agency, however, believes that the cost of financing will be higher in FY23 than that in FY22, further affecting the debt-heavy entities.
Ind-Ra observed that in FY23, a continued rupee depreciation is likely to exacerbate the challenges for both Indian importers and foreign currency borrowers.
“An improvement in demand, although modest, could help the entities in import-oriented sectors or net importers to pass on the impact of weak rupee to their customers.
“Foreign currency borrowers with large unhedged positions are likely to be the worst affected by the weakening of rupee,” the agency said.
Ind-Ra assessed that as of 31 March 2021, approximately Rs 1 lakh crore of debt was denominated in foreign currency. However, entities in export oriented sectors such as textiles, auto, capital goods, gems & jewellery are likely to benefit from the rupee depreciation.
Asymmetric sectoral Impact
The agency noted that the cost structure of entities in the sectors such as auto, capital goods and cement could get affected due to rising commodity prices.
Commodity consumers are likely to experience a contraction in margin by 200-300 basis points (bps) year-on-year (yoy) in FY23, given the difficulty in passing on the price increase to consumers without impacting volumes, per Ind-Ra’s assessment.
Commodity producers such as metals & mining entities typically benefit from higher commodity prices. They deleveraged their balance sheet during FY20-22 on the back of a robust demand and all-time commodity prices, which also will mitigate the interest rate risk. Thus, the post-war case bodes well for commodity producers and they thus could witness a surge in margins by 300-400 bps yoy in FY23.
The agency assessed the credit impact on fertiliser companies to be manageable, given their low leverage. Also, any subsidy sharing by upstream companies and oil manufacturing companies (though unlikely) is unlikely to impact credits, given their strong government linkages.
Geopolitical tensions have not only increased the cost pressures but also affected the export demand, which remains one of the bright spots in the demand recovery. Thus, entities in export-oriented sectors could face pressures on the demand side in FY23, according to the agency.
Ind-Ra said a strong demand in in the telecom sector could enable players to raise tariffs and fully compensate the hike in operating costs.
The agency observed that entities in the power sector have well-defined coal supply agreements and pass through mechanisms which would enable them to fully offset the impact of higher landed prices.
The risk of receivable build-up could, however, impact short-term liquidity. Independent power producers with no pass-through mechanism may experience a contraction in their margins and a build-up of liquidity pressures.
Furthermore, Ind-Ra believes that upcoming renewable power projects could face higher input costs on the back of rupee depreciation