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The Credit Profiles of India Inc. improving as earnings growth exceed debt: S&P

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  • Rising interest rates, inflation and currency risks are likely to have a low to moderate impact on India Inc.
  • A stress test report from rating agency S&P shows that 80% of the rated companies have sufficient liquidity.
  • India Inc. also largely uses 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 an environment of rising interest rates, as a large majority of them have sufficient or strong liquidity, according to a new report from rating agency S&P.

A rising interest rate environment can prove challenging for entities that have accumulated a large amount of debt, as their borrowing costs can become a burden and depress profits. However, a new research report from S&P shows that four in five Indian companies have enough liquidity not to worry about it.

And a falling rupee isn’t that big of a deal either, said S&P’s Deepali Seth-Chhabria.

“We strongly believe that Indian companies have limited vulnerability to exchange rates, so in general S&P argues that large companies are largely unaffected,” Chhabria said, explaining that smaller companies are relatively more vulnerable because they may not be able to to fully pass on inflation and borrowing costs.

Another key metric, according to the report, is the fact that Indian companies have managed to increase their earnings base even while debt remains unchanged. This has resulted in an improvement in credit profiles, which also helps these companies obtain credit on more comfortable terms.

Credit Profiles of India Inc.S&P

Overall, S&P states that 80% of the companies it has reviewed have adequate liquidity, with no major debt maturities in the next 12-18 months.
“Influenced by several macroeconomic factors, we believe India’s corporate sector is well insulated, particularly against interest rates and currency risks that are decreasing the impact of inflation across various sectors. But overall, the overall impact of this on credit profiles is quite limited,” said Neel Gopalakrishnan, principal analyst, director of corporate earnings at S&P Global Ratings.

Capex rises: companies opt for free cash flows over debt

The report also underlined that Indian companies generally use free operating cash flows to finance their investment needs, rather than opting for debt.

This is important, especially at a time when analysts believe India is on the cusp of a post-Covid capex boom.

Sector Interest rates Inflation Forex risk Overall impact
Metals and Mining Low Low to moderate Low Low
IT service Low Low Low Low
Pharma and chemistry Low Low to moderate Low Low to moderate
Car Low Moderate Low Low to moderate

Source: S&P

With rates rising and the US Fed expected to announce another 75bp rate hike in September – and with the RBI in step with the Fed – this may prove to be a more prudent strategy financially.

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