Credit metrics of India Inc. to improve in Oct-Dec quarter: ICRA

Domestic credit rating agency ICRA expects a slight improvement in the credit ratings of India Inc. from 4.5 times in Q2 FY24 to 4.5-5.0 times in Q3 FY24. The credit ratings will be boosted by higher corporate earnings as a result of continuing, though moderating tailwinds from the strong seasonal demand during the recent conclusion of the November festive season, the agency says in a report.

Kinjal Shah, Vice President & Co-Group Head – Corporate Ratings, ICRA Limited, says that the consecutive revenue growth for Corporate India in Q2 FY24 was cushioned by stable demand.

“The 1.6% YoY and 0.1% sequential revenue growth for Corporate India in Q2 FY2024 was supported by steady  demand. However, the YoY revenue expansion was curtailed to an extent due to a general decline in the realisation  levels amidst softening of input costs for most of the sectors,” Shah says.

“While consumer and infrastructure-oriented sectors  supported the expansion, commodity-oriented sector revenues contracted following price correction from the  unprecedented levels in the recent past,” Shah adds.

Shah anticipates the Q3 FY24 revenue growth of Corporate India to be promising, assisted by festival demand. However, it is still uncertain while observing the ongoing uncertainties of the economic environment globally persists.

“The overall impact of food inflation on rural demand and associated sectors would also remain a key  monitorable. Along with this, the concerns of on-going geo-political tensions may also adversely impact demand  sentiment, especially for export-oriented sectors. Furthermore, the pace of growth is likely to remain muted as the  base effect catches up, as is already visible in recent quarters,” Shah says.

The analysis of 601 listed companies’ performance (excluding financial sector entities) by ICRA in Q2 FY24 disclosed that the anticipated OPM (operating profit margins) increased by 398 bps and 64 bps on a YoY and sequential basis, respectively.

This was followed by commodity price softening. The commodity prices remained exalted as compared to the historical levels, while the input costs were softened in the previous months. India Inc.’s OPM (Operating Profit Margin) is expected to revive to its historical heights.

A halt in rate hikes by the MPC (Marginal Propensity to Consume) has also led to YoY development from 3.9 times for Q2 FY 2023 to 4.5 times for Q2 FY2024.

However, it was mostly horizontal on a sequential basis. A revival in earnings is expected in line with a pause on interest rate hike by the RBI, which is going to result in the improvement of interest to 4.5-5.0 times in Q3 FY24.

Shah further says, “While India Inc’s performance in Q3 FY2024 is expected to be supported by the seasonally strong festive period,  the uncertainties in the global economic environment, ongoing geo-political developments, and the impact of  ongoing food inflation on rural sentiment and related sectors are potential headwinds.”

“Accordingly, the ability of  India Inc. to navigate these challenges remains critical. Furthermore, as the base effect catches up, the revenue growth momentum is likely to slow down, with YoY revenue growth estimated at 2-4% for Q3 FY2024 as well as H2 FY2024,” she says.