India Inc.’s credit profiles improve as earnings growth outpaces debt: S&P

• Rising interest rates, inflation and forex risks are likely to have a low to moderate impact on India Inc.
  
• A stress test report by ratings agency S&P has revealed 80% of its rated companies have adequate liquidity.
  
• India Inc. is also largely using its free cash flows to fund capex – an important aspect at a time when analysts believe India is on the cusp of a post-Covid capex boom.
  

Indian companies are well positioned in a rising interest rate environment as a large majority of them have adequate or strong liquidity, according to a new report by ratings agency S&P.

A rising interest rate environment can prove to be troublesome for entities that have amassed a large amount of debt, since their finance costs can become a burden and weigh down profits. However, a new research report by S&P has revealed that four out of five Indian companies have enough liquidity to not worry about it.

And a falling rupee is also not as big a deal, said S&P’s Deepali Seth-Chhabria.

“We highly believe that Indian corporates have limited vulnerability to exchange rates, so overall S&P states that large corporations are largely unaffected,” Chhabria said, while explaining that smaller companies are relatively more vulnerable since they may not have the ability to fully pass on inflation and borrowing costs.

Another important metric, according to the report, is the fact that Indian companies have managed to increase their earnings base even as debts remained unchanged. This has resulted in an improvement in credit profiles, which also helps these companies in obtaining credit at more comfortable terms.


Overall, S&P states that out of the portfolio of companies it has rated, 80% of them have enough liquidity, with no major debt maturities over the next 12-18 months.


“On the influence of various macro-economic factors, our view is that the Indian corporate sector is well insulated, especially to interest rates and foreign exchange risk that has a waning impact of inflation on various sectors. But in general, the overall impact of these on credit profiles is fairly limited,” said Neel Gopalakrishnan, lead analyst, director of corporate earnings at S&P Global Ratings.

Capex is rising: Companies are opting for free cash flows over debt

The report also underlined that Indian companies are generally using free operating cash flows to fund their capex needs, instead of opting for debt.

This is important, especially at a time when analysts believe $4.

Sector	Interest rates	Inflation	Forex risk	Overall impact
Metals and mining	Low	Low to moderate	Low	Low
IT services	Low	Low	Low	Low
Pharma and chemicals	Low	Low to moderate	Low	Low to moderate
Auto	Low	Moderate	Low	Low to moderate

Source: S&P

With interest rates rising and the US Fed expected to announce another 75 bps rate hike this September – and with RBI in lockstep with the Fed – this can prove to be a more prudent strategy in financial terms.

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