"Twenty-six percent of all corporates that Moody's rates in India carry positive outlooks, seventy percent carry stable outlooks, leaving only four percent with negative outlooks," Philipp Lotter, a Moody's Managing Director for the Corporate Finance Group.
"Over the next 12-18 months, India's economy should grow at around 7.5%, and credit conditions should improve for Moody's-rated non-financial corporates and infrastructure debt issuers in pro-cyclical industries," adds Lotter.
Lotter was speaking at the first Moody's and ICRA Annual Credit Conference in Mumbai, held on Wednesday, 13 May.
Lotter said that most of the positive outlooks were on ratings of government-related issuers and therefore linked to the recent change in outlook to positive on the Indian sovereign. However, broader improvements in credit conditions for corporates will also be due to an upturn in economic growth, the banks' pass-through of interest rate cuts, weakness in international commodity prices, and the government's pro-growth policy agenda.
Sectors that will benefit the most include industrials, transport infrastructure, metals and automotives. However, issuers in the upstream oil and gas, and chemicals sectors will see their earnings and cash flows pressured by weak oil prices globally.
Lotter pointed out that the latest economic data in India suggests that a cyclical pick-up in economic activity is underway, as the country's purchasing managers' indices for the manufacturing and services sectors are expanding. In addition, leading investment indicators such as capital goods production and commercial vehicle sales point to a gradual bottoming out in India's capex cycle.
A number of stubborn macroeconomic challenges have also eased significantly. Consumer price inflation has fallen to the mid-single digits, while the country's current account balance is running at an historically mild deficit of 1.1% of GDP.
The reduction in both the country's headline inflation rate and current account deficit provides a more stable backdrop for Indian corporates in terms of market borrowing costs and the exchange rate.
As for the weak commodity prices globally, Lotter says the historically low prices are generally credit positive because operating costs will be lower for sectors such as automotives, manufacturing, infrastructure and power.
On leverage, Lotter says that debt levels are in general stabilizing for Moody's-rated Indian corporate and infrastructure issuers.
On a weighted average basis, Moody's expects debt-to EBITDA to stabilize at 2.8x in 2015 because an upswing in earnings on the back of a recovery in economic activity and improving margins should help shore up key credit metrics for Indian corporates rated by Moody's.
However, structural challenges persist. In particular, the government's ability to push through the Land Acquisition Bill and a unified goods and services tax will be crucial in maintaining positive policy momentum.
Lotter also says that recent policy changes will take effect slowly and that the ability to push through key structural reform and maintain positive policy momentum will be key to maintaining economic growth rates in India.
As for the infrastructure sector in particular, Lotter says that the main challenges facing the industry over the next 12-18 months are issues such as: 1) fuel availability; 2) delays in project approvals; 3) lack of available funding; 4) the weak financial health of the sector; and 5) the loss of momentum in policy implementation.
Lotter pointed out that Moody's portfolio of Indian issuers doubled in size over the last three years. The portfolio is balanced between investment grade and non-investment grade issuers, and seven of the 25 companies are government-owned.
Moody's is focusing on expanding its coverage in India, given that Indian ratings represent just 8% of total corporate ratings in Asia (ex Japan and Australia).