Lead by consumer-oriented sectors, the non-infra corporate sector has witnessed some revival in growth and profitability indicators over last 2-3 quarters of FY2018.
As per an ICRA note on “Indian Corporate Sector, Credit Outlook for FY2019,” the sectors that have witnessed a pick-up in demand are Automobiles, FMCG, Consumer Durables and Retail – aided by low demonetisation base and improved consumer demand on back of the benefits of seventh pay commission, rural recovery and GST rate cuts.
Further good tidings are expected to continue the back of improved rural sales coupled with favourable outlook driven by expectations of normal monsoons, hike in MSPs and overall thrust on agri-economy ahead of elections.
“Moreover we believe that pick-up in the affordable housing segments and infrastructure, primarily road and irrigation projects, are likely to support demand growth going forward in core sectors like cement and steel. Cement production has been on an improving trend over the past few quarters, post demonetization, GST implementation and disruption in availability of sand. Likewise, steel consumption also grew by approximately 6 percent during FY2018 and is likely to grow between 5-6 percent in FY2019 aided by Government’s infrastructure push,” said Group Head – Corporate Sector ratings, ICRA, Subrata Ray.
An ICRA report says that continuing the past two-year trend, corporate earnings improved on back of benign commodity prices and improving consumption demand. This trend continued to an extent in FY 2018 as healthy volume growth helped offset the impact of rising commodity prices. The sectors that could not benefit in FY2018 and witnessed earnings contractions were Telecom, Pharmaceuticals, IT, Airlines, Tyres, and Sugar.
Rising commodity prices and rupee depreciation, coupled with rising inflation and interest rates could affect earnings and credit outlook of Airlines, Automobile, Consumer Durables, FMCG, Chemicals, Paints etc. going forward. However, companies in the oil exploration and metals will be the key contributors to improvement in EBITDA margins owing to steadily rising commodity prices. Accordingly, ICRA estimates that EBITDA of Corporate sector to grow at a faster pace in FY 2019 (13 percent) vis-a-vis turnover (8 percent).
As for capital expenditure requirements, the same has been modest over last several quarters, considering under-utilised capacity across segments and debt burden. Among the key investment driving sectors, only modest capacity addition of 17-18 GW p.a. (21 GW in PY) in the Power sector over the next two years is expected. Steel and Cement will also witness only brown-field addition as companies opt for M&A opportunities in the stressed asset space.
However, investments in automobile sector will continue at the same pace to augment capacity as well as product development requirements to meet upcoming emission norms and safety regulations.
With improvement in commodity prices and overall demand, the financial performance of Metal companies has improved substantially during FY 2018 and is likely to improve further, which is likely to ease pressure on overall corporate sector’s credit metrics. In the construction sector as well, stress appears to have bottomed out aided by divestments, fund-raising initiatives and overall improvement in execution and order inflows. In the power sector, deleveraging and refinancing of SEBs under UDAY scheme and improvement in energy demand is likely to support improvement in coverage indicators.
“ICRA has ‘Stable’ outlook on majority of the corporate sector. However, industries facing significant headwinds are airlines, telecom, real estate, pharmaceuticals, IT and sugar. While the outlook is “Negative” for airlines, telecom and real estate, earnings are expected to remain under pressure in Pharmaceuticals, IT Services and Sugar,” added Ray.
The airline industry has been affected from increasing fuel prices and weak pricing power, despite healthy traction on demand; the telecom sector from overall low ARPUs due to competitive pressures and high debt burden and; the real estate sector from continued phase of stabilisation and consolidation post Real Estate Regulation and Development (RERA) Act and GST implementation.
The Pharmaceutical sector is grappling from pricing pressure in the U.S. generics market, limited new product launches in the generics space and higher costs associated with regulatory compliance. While earnings for IT companies have been on a declining trend reflecting the challenging operating, environment characterised by continued pressure on commoditized IT services, wage inflation, higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate. The domestic sugar industry is currently going through a period of over-capacity with sugar production growth ~45-50 percent during SY 2018 driven by recovery in sugar production from key sugar-producing states viz. Maharashtra and Karnataka where relatively better monsoon over the past couple of years has led to improved cane availability. This has resulted in sharp drop in realization and in turn earnings and credit metrics of sugar companies.