Capital expenditure (capex) recovery continues to be uneven and is being largely driven by government orders and select sectors, wherein capex by large corporates is skewed towards brownfield capacity expansion, according to India Ratings.
“Sectors such as oil & gas, power, steel, automobiles, telecommunication and non-ferrous metals will continue to account for the bulk of the ongoing capex. The Production-Linked Incentive Scheme is a positive for India’s manufacturing footprint in the long term; but it may not contribute significantly to the near-term corporate capex outlook,” said Abhishek Bhattacharya, Senior Director and Head, Large Corporates Analytical Group.
While so far, corporates have used increased accruals from pandemic-related deleveraging to kickstart the deferred capex, capex could overshoot cash flow generation in the current financial year resulting in leverage starting to build up again.
Rural Demand
While rural demand outlook has improved with an increase in farm income, it remains exposed to one-off climatic risks, the note said, adding that entities reliant on asset monetisation to meet deleveraging and liquidity requirements will continue to experience pockets of stress. Further, export demand is seen muted both for merchandise and service sectors, given the global macro headwinds.
“Demand recovery remains uneven across various product categories within the same sectors with premium products and their value chains gaining traction vis-a-vis value or commoditised products.”
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In the eight months to October 2023, India Ratings downgraded 3 per cent of rated entities in sectors such as construction, pharmaceutical and cement. These represented 5-7 per cent of the sector coverage, reflecting issuer-specific liquidity stress rather than sector-specific challenges.
On the other hand, it upgraded 9 per cent entities in automobiles, FMCG and tier-I realty “reflecting continued tailwinds of recovery”, strong order book in the domestic market and abating concerns on supply chain disruptions.
Large corporates
The ratings agency has maintained a ‘stable’ rating outlook for large corporates for H2 FY24 supported by broad-based recovery and improved balance sheets. Of the rated portfolio, 82 per cent entities had a ‘stable outlook’ as of October 2023, same as last year.
Commodity chemicals, construction, textiles and tier-2 realty players remain vulnerable to a slowdown in growth and elevated costs whereas road EPCs are seeing pockets of liquidity stress.
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“The recent geopolitical developments would remain key monitorable from both demand impact and commodity price perspective. Ind-Ra notes that household leverage has crept up and government deficits from counterparty perspective also remain fairly elevated,” it said.
Banks wary
Banks continue to operate with adequate capital buffers and are being extremely selective in lending to lower credit corporates. While market borrowing has recovered, issuances remain limited to highly rated corporates.
“For small players in the value chain, working capital has eased off from the peak in FY21, but remains stretched compared to pre-covid years. Tightening of liquidity could prove challenging for over-leveraged entities.”