Moody’s expects continued earnings uncertainty for India Inc in the near term

Moody’s anticipates short-term uncertainties in India Inc’s earnings due to geopolitics and inflation, but credits robust economic growth.

The gradual reduction in input costs, combined with price increases implemented by businesses, has contributed to a consecutive improvement in companies’ profit margins over the past few quarters.

Nevertheless, Moody’s has indicated that uncertainties surrounding earnings are expected to persist in the short term due to geopolitical developments and the influence of inflation on demand.

Despite this, the ratings agency anticipates that India Inc’s credit quality will continue to be upheld by the nation’s robust economic growth, favorable government policies, and substantial investments in major infrastructure projects.

While major economies are likely to experience weakened demand due to high global inflation and interest rates, Indian corporates are relatively less dependent on exports.

According to Vikash Halan, an Associate Managing Director at Moody’s, although higher inflation is expected to result in weakened profitability, particularly for sectors unable to transfer the increased costs to customers, the relatively robust economic growth in India will help mitigate the decline in earnings for rated corporates.

Moody’s predicts that India will continue to shine brightly in the steel sector among its G20 emerging market counterparts, with the nation’s overall consumption projected to expand further by approximately 5-7% over the course of the next 12-18 months.

Rated steel manufacturers are expected to maintain their credit quality, thanks to significant deleveraging efforts undertaken in recent years. However, their ability to generate free cash flow may be constrained by increased investments in new capacity and the subsequent rise in new debt.

Moody’s has noted that refining and marketing companies face limitations in their ability to transfer the burden of cost increases onto consumers. This is primarily due to the fact that the selling prices of petrol and diesel have remained relatively stagnant since April 2022.

In the future, sectors such as hotels, aviation, construction, and renewable energy are anticipated to witness robust demand growth. On the other hand, sectors including automotive, consumer durables, logistics, power, real estate, pharmaceuticals, fertilizers, healthcare, and retail are likely to experience stable demand.

In the event that El Nino occurs, sectors such as agricultural produce, fast-moving consumer goods, dairy, poultry, edible oils, and tractors are expected to be impacted.