Lead by consumer-oriented sectors, the non-infra corporate sector has witnessed some revival in growth and profitability indicators over the last two-three quarters of FY2018.
As per an ICRA note on “Indian Corporate Sector, Credit Outlook for FY2019,” the sectors that have witnessed a pick-up in demand are automobiles, FMCG, consumer durables, and retail. Low demonetization base and improved consumer demand on the back of the benefits of the seventh pay commission, rural recovery, and GST rate cuts helped boost demand.
Further good tidings are expected to continue on the back of improved rural sales coupled with favorable outlook driven by expectations of normal monsoons, hike in MSPs, and overall thrust on agri-economy ahead of elections.
Subrata Ray, Group Head - Corporate Sector Ratings, ICRA Ltd, said, “We believe that pick-up in the affordable housing segments and infrastructure, primarily road and irrigation projects, are likely to support demand growth in core sectors like cement and steel going forward. Cement production has been on an improving trend over the past few quarters, post demonetization, GST implementation, and disruption in the availability of sand. Likewise, steel consumption also grew by approximately 6% during FY18 and is likely to grow between 5-6% in FY19 aided by the government’s infrastructure push.”
An ICRA report says that continuing the past two-year trend, corporate earnings improved on the back of benign commodity prices and improving consumption demand. This trend continued to an extent in FY18 as healthy volume growth helped offset the impact of rising commodity prices. The sectors that could not benefit in FY18 and witnessed earnings contractions were telecom, pharmaceuticals, IT, airlines, tires, and sugar.
Rising commodity prices and rupee depreciation coupled with rising inflation and interest rates could affect the earnings and credit outlook of airlines, automobile, consumer durables, FMCG, chemicals, paints, etc. going forward. However, oil exploration and metal companies will be the key contributors to improvement in EBITDA margins owing to steadily rising commodity prices. Accordingly, ICRA estimates that EBITDA of the corporate sector to grow at a faster pace in FY19 (13%) vis-a-vis turnover (8%).
As for capital expenditure requirements, the same has been modest over the last several quarters, considering under-utilized capacity across segments and debt burden. Among the key investment driving sectors, a modest capacity addition of only 17-18 GW pa (21 GW in PY) in the power sector is expected over the next two years. Steel and cement will also witness only brownfield additions as companies opt for M&A opportunities in the stressed asset space. However, investments in the automobile sector will continue at the same pace to augment capacity as well as product development requirements to meet upcoming emission norms and safety regulations.
With an improvement in commodity prices and overall demand, the financial performance of metal companies has improved substantially during FY18 and is likely to improve further; this will most likely ease the pressure on the overall corporate sector’s credit metrics. In the construction sector as well, stress appears to have bottomed out aided by divestments, fund-raising initiatives, and overall improvement in execution and order inflows. In the power sector, deleveraging and refinancing of SEBs under UDAY scheme and improvement in energy demand is likely to support improvement in coverage indicators.
“ICRA has ‘Stable’ outlook on a majority of the corporate sector. However, industries facing significant headwinds are airlines, telecom, real estate, pharmaceuticals, IT, and sugar. While the outlook is “Negative” for airlines, telecom, and real estate. Earnings are expected to remain under pressure in pharmaceuticals, IT services, and sugar," Ray added.
The airline industry has been affected by increasing fuel prices and weak pricing power despite healthy traction on demand. The telecom sector from overall low ARPUs due to competitive pressures and high debt burden; and the real estate sector from a continuous phase of stabilization and consolidation post the implementation of the Real Estate Regulation and Development (RERA) Act and GST.
The pharmaceutical sector, meanwhile, is grappling with pricing pressure in the US generics market, limited new product launches in the generics space, and higher costs associated with regulatory compliance. While earnings for IT companies have been on a declining trend reflecting the challenging operating, environment characterized by a continued pressure on commoditized IT services, wage inflation, higher onsite costs necessitated by visa curbs, as well as lower discretionary spend by corporate.
The domestic sugar industry is currently going through a period of over-capacity with sugar production growth ~45-50% during SY18 driven by the recovery in sugar production from key sugar-producing states viz. Maharashtra and Karnataka, where relatively better monsoon over the past couple of years has led to improved cane availability. This has resulted in a sharp drop in realization and in turn earnings and credit metrics of sugar companies.