Corporate India On A Stronger Credit Footing, S&P Says

S&P Global Ratings said the rated Indian companies are in ‘good credit shape’ due to strong underlying growth and accommodative balance sheets.

A supportive factor is India's economic growth, which is the highest in the region, estimated at 6% for 2023 and 6.9% in 2024, S&P said in a statement. Moreover, strong onshore liquidity mitigates the impact of tougher external-funding conditions, it noted.

"Solid earnings momentum over the next two years, by our forecasts, will make for one of the healthiest four-year stretches seen," S&P Analyst Neel Gopalakrishnan said.

The rating agency said the aggregate EBITDA in the fiscal year ending 31 March 2024 (FY24) will likely be about 50% higher than five years back for rated corporate and infrastructure entities in India. Yet aggregate debt is hardly changed, reflecting the improvement in credit quality, it added.

S&P, however, expects limited rating upside, given the improvement in credit quality is reflected in its base-case assumptions. Some 85% of its ratings on India-based corporate and infrastructure entities have a stable outlook, it added, noting that financial profiles are strengthening within current rating categories.

SOLID OPERATING CONDITIONS

S&P said rising domestic demand in India and sector-specific recovery are more than offsetting negatives, including tough global economic conditions and higher policy and borrowing rates.

The rating agency said financial discipline aided by strong operating cash flows led to significant deleveraging in Indian corporates over the past three years.

The debt reduction will likely a remain a focus for many rated companies, though the pace of deleveraging will slow because of rising capital expenditure, it added.

The median debt to EBITDA for the rated portfolio (excluding debt-free IT companies and infrastructure/utility companies that typically have higher leverage) will likely fall to about 2.4x by March 2024 from about 2.7x the year before, S&P said. This is a significant decline from 4.3x as of March 2020, it noted.

The rating agency said leverage for infrastructure/utility entities is likely to decline to about 5.2x by March 2024 from its estimated 6.3x as of March 2023.

"The improving leverage for infrastructure/utility companies is largely driven by a higher earnings base, rather than debt reduction," S&P Credit Analyst Cheng Jia Ong said.

S&P, however, noted these companies are unlikely to deleverage below 5x, given capital expenditure funding at 70:30 debt-to-equity mix.

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