India Ratings and Research (Ind-Ra) has maintained a stable outlook on commodity and consumption-linked sectors while maintaining a negative outlook on thermal power, public sector banks, real estate and telecom sectors. At an aggregate level, the agency expects corporate stress to have plateaued, with the majority of the stress being crystalised.
In FY20, Ind-Ra believes that pressure on operational cash flows is likely to continue for the corporates at a macro-level, especially in the absence of meaningful improvement in profitability. With volatility in capital flows continuing well into FY20, the agency opines the ability of the corporates to tie up financing in a timely manner is likely to remain constrained. Consequently, financing risks and funding costs are likely to remain elevated in FY20.
Downgrades Outpace Upgrades in YTD FY19: Tighter market liquidity conditions in FY19 coupled with the combined hardening of commodity prices, weakening rupee and delayed recovery prospects post demonetisation and Goods and Services Tax implementation, resulted in higher downgrades in Ind-Ra’s portfolio. Through FY20, the agency believes, liquidity management is likely to be the key differentiator. As financing risks are likely to remain elevated, especially for corporates with weaker credit profiles, corporates will be required to put in place measures to tie up funding in a timely manner to avert credit events.
Corporate Capex to Remain Subdued: Ind-Ra expects corporate capex to grow at a mid-single-digit level, primarily on account of a capacity overhang coupled with domestic and external uncertainties. Further, maintenance capex is likely to comprise around 70% of the total capex in FY20, resulting in about INR1.35 trillion growth capex in FY20. Nonetheless, the agency expects oil and gas, and construction sectors to meaningfully expand their balance sheets in FY20.
Capital Flows to Remain Volatile: Over the last two decades, the extent of integration with the global economy has invariably increased. This, over the last decade, has not been challenging, given the benign liquidity conditions globally. However, as liquidity conditions globally start to tighten, funding the trade deficit is likely to undergo occasional bouts of volatility. Ind-Ra expects a large part of the capital flows to the emerging markets will continue to be skewed towards Chinese debt markets in the foreseeable future, amid weakening current account balance in China. This is likely to prompt the government to open up the domestic debt market to attract capital flows. The agency expects the slowdown in the global trade volume to persist and China, by extension, is expected to crowd out capital flows to emerging markets over the near-to-medium term.
Excess Bond Supply to Keep Corporate Yields Elevated: Ind-Ra expects capital market issuances to grow around 11% YoY in FY20, driven by a regulatory push in the corporate sector, and sizeable issuances by both the central and state governments. On the other hand, with a rise in risk aversion – by both banks and institutional capital market investors – appetite for fixed income instrument is unlikely to expand in a concomitant manner. In the corporate bond market, the agency expects bond supply to outpace demand by around INR1 trillion. The surge in foreign flows to corporate bonds could mitigate such demand-supply mismatches in a similar vein in FY18, but this is not the base case assumption for Ind-Ra.
Ind-Ra expects the 10-year government security yield to range between 7.3% and 7.4% at FYE20. Despite limited near-to-medium term pressure on benchmark yields, transmission of the interest rates to the corporate borrowers is likely to remain weak.
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