The Russian invasion of Ukraine is expected to hit India's pharmaceutical and subsidy-linked sectors such as fertilisers the hardest, according to a report by India Ratings (Ind-Ra).

"Pharma has meaningful exports to the countries in Commonwealth of Independent States which coupled with the ongoing pressure on generic pricing in the US could impact the profitability of some companies," the rating agency said.

The Fitch Group-owned agency, however, added that given these entities have low leverage on their balance sheets, credit risk is expected to be minimal. "Increasing business risks in the event of a prolonged disruption could impact credits."

Ind-Ra further estimates that higher food, fertiliser and oil prices are likely to put pressure on the subsidy allocation by the Indian government for fertilisers and LPG.

Russia produces huge amounts of potash and phosphate - key ingredients used in making fertilisers.

"If the government were to refrain from increasing the fertiliser subsidy, the deficit would need to be funded by the balance sheet of fertiliser companies, thus deteriorating their credit metrics," the rating agency noted, adding that the credit impact on fertiliser companies is assessed to be manageable, given their low leverage.

The agency believes that the increase in commodity prices could result in a stretched working capital cycle for small and medium enterprises (SMEs), thereby weakening their debt servicing ability.

Indirect Impact of Russia-Ukraine conflict

Ind-Ra assessment based on analysis of top 1,400 corporate entities (excluding oil and financial entities) as per total debt, highlights a limited-to-moderate impact on the credit.

The analysis suggests that in a scenario of commodity prices sustaining at the current levels, rupee depreciating by 10% and an increase in the borrowing costs by 1%, median EBITDA margins could be impacted by 100 to 200 basis points for commodity-consuming sectors.

The debt at risk would exceed by ₹1.2 lakh crore compared to what was anticipated prior to the war, or under steady state condition.

Any material rise in interest rates could increase the EMI burden on borrowers, Ind-Ra said. Non-banking financial institutions have adequately provided towards standard and delinquent assets and also have capital buffers to absorb a rise in credit cost, it added.

Ind-Ra also expects commercial vehicle financiers to face some credit deterioration in their borrower segment as cash flow gets impacted with an increase in the fuel cost which accounts for up to two-thirds of the operating cost for vehicle operators.

Brent crude – the international benchmark – jumped to a 14-year high of over $130 a barrel amid speculation that the US is likely to ban oil imports from Russia.

The agency, however, noted that in the case of lower fleet utilisation owing to an overall weakness in the aggregate demand, fuel price increases may not be passed on as freight rate increases. "In such a situation, borrowers with thinner margins may end up delinquent, impacting commercial vehicle loan portfolios for their lenders."

Ind-Ra said the duration and intensity of the war will be the key determinant for the macro and micro risks. "Although the direct impact seems to be limited on the credits based on limited escalation from the ongoing situation, the rippling effect will be disproportionately higher in case the situation aggravates or continues for long," it said.

Ind-Ra believes the domestic banking system has adequate liquidity but this does not ensure market liquidity and balance sheet liquidity for the system as a whole. "In the backdrop of rising uncertainties, high energy prices and cautious sentiments in the capital markets, the entities with a weak financial profile could face financing challenges in case the situation worsens."

India's pharma exports

Russia-Ukraine war: India's pharma, fertiliser firms most vulnerable