The sequential revenue growth for India Inc. is expected to “taper” in the first quarter of the current fiscal (Q1 FY25), as per research firm ICRA. While signs of a revival in rural demand have emerged, headwinds such as a slowdown in the Government of India’s (GoI) spending during the Parliamentary elections and onset of monsoon period are likely to weigh on growth in the first half of the current fiscal, the agency says in a latest report.

ICRA expects the operating profit margin (OPM) to remain steady in the range of 15-18%, despite the expected tapering in revenue growth, as raw material costs are expected to remain steady. The credit metrics of India Inc. in Q1 FY25 are estimated to remain largely stable with the interest coverage ratio in the range of 4.7-5.0 times, against 4.9 times in Q4 FY24.

Evolution of the global economic scenario and the onset and intensity of the monsoons in India, would remain a key monitorable over the near term, it says in a note.

“The 5% YoY and 6.3% sequential revenue growth for Corporate India in Q4 FY24 was supported by healthy demand in consumer-oriented sectors like airlines, hotels, automotive and FMCG. In addition, the growth in power and construction sectors was strong. The YoY revenue expansion was curtailed to an extent by a decline in realisation levels amid softening input costs (mainly raw materials), largely for sectors like fertilisers and chemicals, which also faced a demand slowdown due to channel inventory destocking,” says Kinjal Shah, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA.

Shah opines that the growth will marginally slow down in Q1 FY25 (on a QoQ basis), on a relatively high base, amidst a perceived temporary pause in the infrastructural activities for a major part of April-June period of the current fiscal due to the general elections and the dependency of rural demand on the monsoon. Moreover, the concerns of the ongoing geopolitical tensions may adversely impact demand sentiments, especially for export-oriented sectors, he adds.

ICRA’s analysis of the Q4 FY24 performance of 558 listed companies (excluding financial sector entities) revealed expectedly improved OPM, increasing by 92 bps to 17.2% on a YoY basis. This was primarily aided by the softening in commodity prices and benefits of operating leverage. However, on a sequential basis, the OPM remained flat.

Sectors such as auto, power, pharmaceuticals and metals & mining reported YoY improvement in OPM on the back of gradual price hikes undertaken and softening of input costs. On the other hand, some others sectors like chemicals and fertilisers reported YoY contraction due to weak demand for these sectors. While the input costs softened in recent months, they remained higher compared to the historic levels, and accordingly, India Inc.’s OPM is yet to revive to its historic highs (18-19% seen in FY22).

The interest coverage ratio of ICRA’s sample set companies, adjusted for sectors with relatively low debt levels (IT, FMCG and pharma), improved marginally on a YoY basis to 4.9 times in Q4 FY24 from 4.8 times in Q4 FY23. With the Monetary Policy Committee (MPC) having taken a pause on rate hikes since its April 2023 meeting, India Inc.’s interest coverage is expected to remain largely stable in the near term.

The report highlights that India Inc. reported a marginal increase in debt levels in FY24 on a YoY basis, predominantly in sectors like gems and jewellery, construction, sugar, chemicals (due to increase in working capital requirements). Despite the variations in debt levels across sectors, India Inc. reported largely stable credit metrics over the recent past. The improvement in earnings on the back of recovery in demand across sectors arrested any sharp increase in Total Debt/OPBITDA levels of India Inc. during FY24 (total debt/OPBITDA at 3.3 times in FY24, against 3.7 times in FY23).

The indebtedness trends have been divergent across sectors, with five sectors - ferrous and non-ferrous metals, telecom, power, and oil and gas - accounting for 69-70% of ICRA’s sample set companies’ debt. Capacity expansion being undertaken in ferrous and non-ferrous metals as well as the power sector drove debt addition in Q4 FY24. Debt movement in the oil and gas sector was volatile, with working capital requirements changing in line with variations in crude prices, refining and marketing margins, the report notes.

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