The rating expects earnings of top 100 companies to drop by 15% to 20% in fiscal 2027 in case energy costs remain elevated which will increase the debt to EBITDA (earnings before interest tax depreciation and amortization) ratio for the large companies.
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“The leverage for the large companies could increase by 0.5 times to 1 times of EBITDA. Supply disruptions could cause a material weakening in credit quality though the impact of just higher energy prices in more manageable,” Anshuman Bharati, associate director, corporate rating, S&P Global Ratings.
The rating agency has listed refining and airlines as two most vulnerable sectors with cement, metals and steel also facing risks due to their dependence on energy imports. Higher food and fuel costs could also impact disposable incomes and bank credit to sectors like unsecured loans, affordable housing and vehicle loans, S&P said. The rating agency has assumed oil prices at $85 per barrel in the current fiscal year rising to $130 per barrel in the worse case scenario.
“Steel, metals and mining, chemicals, refining, cement, airlines could be the sectors that are impacted but the rise in NPA would still be less than 1% per annum which is still lower than what we have seen in recent years. Higher food and fuel prices will also impact disposable incomes if the situation is prolonged,” said Geeta Chugh, managing director, financial institutions ratings at S&P. Chugh said the Reserve Bank of India (RBI) may allow targeted restructuring to manage short term cash flow stress for some sectors in case the situation prolongs.
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Chugh said RBI along with other emerging market regulators could also look at similar measures. She expects India’s banks to be on a risk off mode as a result of which credit growth is likely to weaken to 10% to 11% this fiscal from 12% to 13% last fiscal if the energy situation persists.
The rating agency however expects fiscal strains and a wider current account deficit as the government tries to keep inflation under check. The government has not allowed pump prices to increase, by reducing excise duties and passing on the burden to oil marketing companies.
YeeFarn Phua, director, sovereign & international public finance ratings at S&P said excise duties make up about 10% of government revenues which could weaken if these cuts become structural in nature.
“If these cuts become structural or prolonged it could create problems. We expect the cuts to be reinstated whenever the situation settles. Though there could be a challenge for the government’s fiscal deficit target particularly if fertilizer subsidies balloon, we do expect the government to keep its commitment in the next two to three years,” Phua said. S&P expects India’s growth to print at 7.1% in the current fiscal year.