India's companies look set to struggle under a mixture of a struggling economy, the tapering of the US quantitative easing programme, and a lack of clear policy direction from the government, according to rating agency Moody's and local ICRA.
A report from the credit rating agencies on February 24 highlighted non-banking corporates focused on the domestic market as the most vulnerable in current conditions. The report, written for the first time in collaboration with Moody’s Indian associate ICRA, is the result of the former’s coverage of 16 mostly blue-chip Indian corporates and the latter's analysis of 6,500 corporates in India across multiple sectors.
"Lower economic growth, volatile exchange rates, rising borrowing costs, tighter lending and monetary conditions and slow economic reforms have dampened prospects across many sectors," said Anjan Ghosh, a senior group vice president at ICRA, summarising the report.
India reported 4.5% economic growth in the quarter that ended in December 2013, below the 4.8% in previous quarter and well behind what had been its 2005-2010 average of 8.8%. The slowdown came despite a lower inflation and a robust reduction in current account deficits - the latter was reported at 3.1% of gross domestic product (GDP) for the first half of the 2013/2014 fiscal year, down from 4.5% of GDP in the same period for the previous year.
Oil and gas
The report considers India's oil and gas refining and marketing sectors to be among the weakest sectors in the economy, in addition to India's banking sector, which faces capital and asset quality issues. The main aggravation for companies in the oil and gas area is the likely delay in subsidies reimbursements due to the upcoming elections. For state-owned refiners that will mean further pressure on the bottom line from short-term debt and likely higher financing costs.
"For upstream oil and gas there are not many problems, things will not get worse than they are at the moment," said Vikas Halan, a Moody's vice president and senior analyst. However, "in downstream margins are weak, and net capacity addition this year is higher than the demand. The quarter ending in December 2013 was one of the worst for the sector".
A weak rupee is further set to cut into their profitability as companies in the sector still rely heavily on imports of crude oil - with the examples of Bharat Petroleum Corp. and Indian Oil Corp., which import about 70%-75% of their needs, and on heavy borrowing conducted in foreign currencies.
Not everybody is so pessimistic. A separate report from Fitch dated December 2013 painted a less worrisome picture for the industry. The rating agency changed a number of Indian state-owned players' outlook to stable in light of the energy price reforms. It noted that "the significant depreciation of the local currencies of India and Indonesia have had only a limited impact on the rated oil & gas issuers in these markets, largely because of their US dollar-linked earnings".
Fitch's relatively sanguine view stands in sharp contrast to Moody's and ICRA. It is telling that the latter agencies' report had a negative outlook of six out of the 11 sectors analysed.
In addition to worries about energy-related companies and banking, "our outlook is also negative for the steel, metals and mining sectors, because the weak economy and capacity expansions will weigh on the margins and utilization rates of steel-makers," said Moody's Halan.
The report added that cement, real estate, retail and automotive are also likely to experience increased pressure due to monetary policy and the weak growth trend.
The outlook is stable for a number of sectors whose growth is driven by international trade flows and exports, but above all hangs the spectre of political immobility. "A new majority government will not be an automatic fix to the paralysis of the last couple of years," said Halan.
With elections due in three months, India's already indecisive policy making has come to a complete standstill, leaving market players with a volatile rupee and subdued confidence that will make investments even less likely. Some hope has come from the hastened approval process for investment projects done by the newly-instituted Cabinet Committee on Investment, but it is still unlikely that much will move before the dust settles after the election scheduled to take place by May.
A lot will need to be done at that time if India is to regain some economic momentum. The report states that “policy and economic reforms in key areas, including power, mining and fuel subsidies, will need to be accelerated to better unfold the country’s demographic advantage and support the economic growth required to absorb up to 12 million new entrants into the workforce each year.”
The speed and ability of India's next government to begin tackling these issues will in large part come down to the stability of the coalition that is formed. India's companies will be hoping that it is viable, or they could be in for some tough times to come.