Mumbai, Aug 26: Indian companies and banks is expected to feel the bite of high inflation and rising interest rates, but rated issuers are generally better cushioned to withstand, S&P Global Ratings said in a report.
However, renewables are relatively more exposed to rising rates due to large capital expenditure. The report do not expect any default in the rated portfolio, which benefits from access to domestic banks and capital markets.
“Banks will not be immune, but we expect that in the stress scenario NPLs could rise modestly,” the report added.
Corporate sector:
Large-rated corporate credits in general have adequate cushion to withstand rising rates, widening credit spreads, and increasing input costs. This is mainly due to the significant de-leveraging and improvement in operating fundamentals over the past two years.
Most companies also do not need meaningful funding for CAPEX or financing, shielding them from the increase in funding costs. Further, only about 30 percent of the debt of the rated issuers is floating rate in nature, limiting the effect of the increase in interest rates.
Infrastructure sector:
The infrastructure sector is more exposed to the rising interest rates because higher Capex plans and some upcoming re-financing will result in a higher-than-anticipated interest burden.
This is despite a high proportion of existing fixed-rate debt being largely insulated from rising interest rates. The rating agency believes some of the renewable projects undertaken in the past few years were premised on rates remaining low. Returns for these projects will be anemic, if not loss-making.
Nevertheless, generally, high operating margins will limit damage from inflationary pressures. The high proportion of US dollar-denominated debt with aggressive hedging through call options with knock-in-knock-out options exposes the issuers to higher hedging costs to roll the hedge for a higher strike price (hedge falls off on reaching the strike price). We expect all players to remain covered by incremental hedges. But rising hedge costs could further strain weak financials, with the existing ratio of debt to EBITDA at about 7x.
Banking Sector:
The rating agency expects the Indian banking sector to solidify its position. It projects the sector’s weak loans (NPLs and performing restructured loans) will continue to decline to 4.5 per cent-5 percent of gross loans by March 31, 2024. This projection takes into account the continuing resolution and recovery of legacy problem loans.
Likewise, S&P Global forecast credit costs to normalize to 1.2 percent for fiscal 2023 and stabilize at about 1.1 per cent-1.2 per cent for the next couple of years. This makes credit costs comparable to those of other emerging markets and to India’s 15-year average.
The small and midsize enterprises (SME) sector and low-income households are vulnerable to rising interest rates and high inflation. But, in our base case of moderate interest rate hikes, we view these risks as limited. Likewise, we expect the return on average assets to normalize to 1 per cent in fiscal 2023 — an eight-year high.
The rating agency expected inflation of 6.8 percent for the current fiscal and 5.8 percent in January-March 2023. India’s
initial rise in inflation was fuelled by high fuel and commodity prices. Inflation has since become broad-based and persistent.
Consumer demand is weak in many pockets, yet core inflation remains elevated as companies seek to protect margins by passing on rising input costs to consumers. Also stoking inflation is the rebound in contact-based services.
Meanwhile, they expect India’s GDP to grow by 7.3 percent in fiscal 2023 (for the year ended March 31, 2023) compared with 7.8 percent six months ago. The causes of this downward pressure on growth are high oil prices, slowing global demand for India’s exports, and of course high inflation. This inflation is eroding the purchasing power of the poor because energy and food account for a chunk of their consumption basket.
