Demand for industrial credit from corporates with capital expenditure (capex) plans will remain muted due to strong cash flows, modular nature of investments and flexibility to tap equity markets, according to India Ratings and Research (Ind-Ra).

Consequently, corporates financial leverage is likely to remain muted and a meaningful increase in the credit offtake from banks and capital markets will be largely driven by movements in working capital cycles and potential inorganic opportunities.

Ind-Ra said that this could keep credit spreads tighter than historical levels and expose the system to mispricing of risk. It has estimated banking system credit growth of around 15 per cent year-on-year for FY25.

Corporates avoiding leverage build-up

The agency’s assessment of the previous meaningful debt capex cycle (FY10-FY14) in relation to the ongoing cycle clearly highlights the better risk management practices of corporates in avoiding leverage build-up and maintaining adequate buffers to manage downside risks.

This probably bodes well for the credit cycle, although intensifying competition from lenders/investors could result in misallocation of risks.

“Strong cash flows coupled with the buoyant equity market have been limiting credit demand from corporates. This is creating ample room for financial entities to tap various financing channels at ease and borrowing at finer rates.

“While the current dynamics is expected to keep demand for industrial credit low in the near term, investments in new-age capex such as alternative energy and re-engineering existing manufacturing process would require heavy lifting from banks in the medium-term”, said Soumyajit Niyogi, Director, Core Analytical Group, Ind-Ra.

Cash flow generation ability much stronger

A sector-wise comparison of aggregate cash flow from operations (CFO) and capex between the years FY19-1HFY24 versus FY10-FY14 suggests the cash flow generation ability has been much stronger and hence provides sufficient cushion for many companies to meet capex requirements, per the agency’s assessment.

This contrasts with the scenario during FY10-FY14, leading to higher borrowings from capex-heavy sectors -- power, iron & steel, and telecom, Ind-Ra said.

Corporates preferring equity over leverage

Also, the aggregate equity capital raised during FY19-1HFY24 has been ₹4.9 lakh crore as against ₹1.3 lakh crore during FY10-FY14, hinting towards corporates preferring equity over leverage in the recent past.

Ind-Ra’s analysis of the financial statements of top 100 listed corporates (excluding banking and financial services institutions) highlights limited cash outflows in terms of working capital requirements and debt servicing requirements. This ensures sufficient cushion is available even after outflows in the form of capex, dividends, and buybacks.

Overall, Ind-Ra analysed the financial statements of 3,328 listed corporates (excluding banking and financial services institutions) to arrive at the analysis. The companies were divided into three buckets: Top 100, 101-250 and 251 & above based on their revenues.

“For the corporates in the bucket 101-250, the cushion has been limited on account of higher capex outflows mitigated to a certain extent by an improving working capital cycle,” the agency said.

“The corporates in the 251-and-above bucket though have seen an improvement in cushion during 1HFY24; they are likely to face challenges during the near to medium term on account of increasing cost of debt, higher working capital cycle and ongoing capex,” it added.

The agency emphasised that most large borrowers as well as large capex spenders have strong cash flows. This coupled with limited capex spending has reduced incremental borrowings on a net basis by these entities.

Ind-Ra expects the trend to continue, albeit with a moderate pickup in credit demand. It underscored that even with solid cash flow generation, large Indian corporates have kept their outflows by way of capex, stock buybacks, and relatively low dividend pay-outs.

In terms of credit offtake from schedule commercial banks, large corporates at a CAGR (compounded annual growth rate) of merely 2.3 per cent (FY14-FY24) lag the MSME sector with a CAGR at 8.7 per cent.

“The MSME sector may see a surge in borrowings. This trend may be underpinned by a multitude of factors, including lower cash accruals, higher interest outflows, and increasing requirements of working capital necessary for expansion and daily operations,” the agency said.