Indian Corporate Sector – Trends & Outlook
ICRA RESEARCH SERVICES Corporate Ratings Indian Corporate Sector – Trends & Outlook RATING FEATURE Anjan ICRA Ghosh +91 22 6179 6392 [email protected] Contacts: Subrata Ray +91 22 6179 6386 [email protected] April 2015 What’s Inside A. B. C. D. Overview Economic Outlook Financial Performance of Corporate Sector in Q3 FY 2015 Sector-Wise Outlook a. Commercial Vehicle b. Passenger Vehicles c. Auto Components d. Hotels e. Pharmaceuticals f. Textiles g. Real Estate h. Cement i. Construction j. Oil & Gas k. Iron & Steel l. Telecom m. Power Analyst Contacts Sector Economy Automobiles Auto Components Pharmaceuticals Textiles Real Estate Cement Construction Oil & Gas Iron & Steel Telecom Power Hotels ICRA Limited Analyst Contacts Aditi Nayar [email protected] Shamsher Dewan [email protected] Jitin Makkar [email protected] Shamsher Dewan [email protected] Anil Gupta [email protected] Shubham Jain [email protected] Noopur Jain [email protected] Shubham Jain [email protected] Anoop Bhatia [email protected] Soumyo Roy [email protected] Harsh Jagnani [email protected] Girish Kumar Kadam [email protected] Pavethra Ponniah [email protected] Subrata Ray [email protected] Subrata Ray [email protected] Subrata Ray [email protected] Rohit Inamdar [email protected] Rohit Inamdar [email protected] Sabyasachi Majumdar [email protected] Rohit Inamdar [email protected] K Ravichandran [email protected] Jayanta Roy [email protected] Sabyasachi Majumdar [email protected] Sabyasachi Majumdar [email protected] Subrata Ray [email protected] P a g e |2 Indian Corporate Sector – Trends & Outlook ICRA RESEARCH SERVICES Update April 2015 ICRA RATING FEATURE Overview Coverage metrics weakened in Q3 FY 2015 The operating performance of Indian corporate sector remained relatively muted in Q3 FY 2015 as revenue growth failed to sustain on back of weak trends across consumption-driven sectors, continuing challenges on the execution front in the infrastructure space and absence of meaningful recovery in capex cycle. The sharp correction in global commodity prices, especially crude oil also took a toll on the Oil & Gas sector leading to lower realizations (for oil producing companies) and inventory losses (for refining and oil marketing companies). Accordingly, the aggregate revenues for 455 listed entities in our sample grew by a modest 1.3% in Q3 FY 2015 compared to 7.2% in H1 FY 2015. Excluding the Oil & Gas sector, the revenue growth stood at 6.5% vis-à-vis 9.2% in H1 FY 2015. From profitability perspective, although the aggregate trend in EBITDA margins remained relatively stable but the number of sectors which witnessed margins contraction increased from just one (in Q2 FY2015) to six (in Q3 FY 2015). More importantly, the sector like Metals, Capital Goods, Real Estate which have been impacted the most during the recent slowdown are yet to see meaningful improvement in earnings. While consumption trends remained subdued, companies in sectors like FMCG, Consumer durables, Auto Components etc. reported stable margins, benefitting from lower commodity prices. As revenue growth remained muted and some of the key sectors, especially Oil & Gas witnessed sharp decline in earnings, the aggregate interest servicing also came off from 5.7x (in Q3 FY 2014) to 4.7x (in Q3 FY 2015). Notably, the interest coverage ratio also deteriorated during the quarter across some of stretched sectors like Construction, Iron & Steel, Real Estate, Hotels, and Textiles. Improvement in GDP growth expected to be gradual in FY 2016 Following change in the base year, improvement in methodology as well as enhanced coverage, India's economy is now estimated to have grown at a higher pace over the past couple of years (based on the new series). The growth momentum further picked-up during 2014-15 (i.e. 7.4% in 9m FY 2015) driven by sharp surge in Government's Final Consumption Expenditure (GFCE), especially in Q3 FY 2015 and modest pick-up in private consumption. This coupled with moderating inflationary pressures, initiation of rate cuts by the RBI and comfortable current account deficit (CAD) are a positive for the corporate sector going forward. The Government at the centre has also taken series of incrementally positive steps to revive the investment cycle by committing higher allocation for infrastructure projects as well as the addressing the need for introducing alternative funding sources. ICRA Limited P a g e |3 Overview Proposals like introduction of tax-free infrastructure bonds, taxation benefits for REITs and creation of National Investment and Infrastructure Fund are steps in that direction. In addition proposals like "Plug-and-Play" model for power projects and hybrid structure for road projects also aim to rationalize the allocation of risk in PPP projects and thereby encourage private sector investments. While all these steps are likely to improve the operating environment for corporate sector, the continuing impact of structural issues on execution of infrastructure projects, uncertainties related to availability of key resources (i.e. coal, natural gas, iron ore etc.) and high indebtedness of certain corporate groups may prevent sharp pick-up in investment activity. The following report examines performance of several sectors in 9m FY 2015 and provides outlook on thirteen sectors. These include Oil & Gas, Power, Iron & Steel, Cement, Telecom, Real Estate, Construction, Passenger Vehicles (PV), Commercial Vehicles (CVs), Auto Components, Pharmaceuticals, Textiles and Hotels. Despite adverse impact of rural slowdown on Two-Wheeler and Tractor sales, the outlook on the Indian automobile sector continues to be stable. The PV and 2W industry is estimated to incur Rs. 431 billion in capacity additions over the next 3-4 years. While demand for PVs will benefit from improving cost of ownership, replacement demand and slew of new model launches, ageing fleet and expectations of demand revival in the mining and infrastructure space will support CV sales. The outlook on sector like Cement and Iron & Steel depends to a large extent on pick-up in demand from infrastructure as well as housing sectors. Although cement dispatches at 7.1% in 10m FY 2015 have been better than the previous year, the sales trend during Q3 FY 2015 was relatively tepid. Likewise, outlook on the Indian Steel sector has also weakened somewhat due to increased pricing pressures from cheaper imports. Although reduced domestic iron ore prices and low coal prices would provide some support to margins of steel players but aggressive bidding in the recent coal block auctions is likely to increase the cost of production of concerned players using the sponge iron route. Execution related challenges and stretched liquidity position of entities in the construction space continue to keep outlook muted. These factors along with subdued demand, excess capacity and low affordability levels also creates outlook for real estate developers relatively less benign. Despite sharp fall in crude oil prices, the overall outlook for the Indian Oil & Gas sector remains stable driven by improved prospects for Oil Marketing Companies (OMCs), partially offset by challenging environment for upstream companies. ICRA believes that the recent announcement related to the downward correction in domestic gas prices (from April 2015) in line with decline in global gas price indices and lack of clarity on pricing of complex offshore fields continues to be a dampener. Further, softened crude oil prices may continue to have an adverse impact on earnings of oil producers as well as oil field services firms with the likely drop in charter rates for rigs. However, low crude oil prices and planned implementation of direct benefit transfer scheme would witness fall in under-recoveries, leading to improvement in the liquidity position of OMCs. ICRA Limited P a g e |4 Overview In the telecommunication sector, spectrum payouts for the industry have become sizeable (post conclusion of recent auctions), which will add to the existing debt levels of telcos. This along with high proportion of foreign exchange denominated debt remains a concern. The earnings outlook however is improving on account of restoration of pricing power. Further, increasing penetration of smart phones and attractive pricing of data services by telcos is supporting healthy growth in data services. Improving regulatory environment is also a positive. Earnings of entities in the pharmaceutical sector will be supported by patent expiries in the U.S., strong product pipeline of leading Indian generics players and stable growth prospects in the domestic market. However, currency headwinds in emerging markets business and pricing pressure in the U.S. have impacted earnings to some extent. With improvement in capacity utilization and revenue visibility, we expect some pick-up in capacity additions in the auto component manufacturing space – especially in the PV and 2W space. The auto component sector also benefits from OEMs increasing focus towards localization plans. Confluence of these factors along with relatively lower commodity prices is likely to support margins for auto component manufacturers. ICRA Limited P a g e |5 ICRA Contact Details CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 REGISTERED OFFICE 1105, Kailash Building, 11th Floor, 26, Kasturba Gandhi Marg, New Delhi – 110 001 Tel: +91-11-23357940-50 Fax: +91-11-23357014 MUMBAI Mr. L. Shivakumar Mobile: 9821086490 3rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025 Ph : +91-22-30470000, 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: [email protected] GURGAON Mr. Vivek Mathur Mobile: 9871221122 Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 E-mail: [email protected] ICRA Limited CHENNAI Mr. Jayanta Chatterjee Mobile: 9845022459 Mr. Leander Rayen Mobile: 9952615551 5th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai-600035. Tel: +91-44-45964300, 24340043/9659/8080 Fax:91-44-24343663 E-mail: [email protected] [email protected] KOLKATA Ms. Vinita Baid Mobile: 9007884229 A-10 & 11, 3rd Floor, FMC Fortuna, 234/ 3A, A.J.C. Bose Road, Kolkata-700020. Tel: +91-33-22876617/ 8839, 22800008, 22831411 Fax: +91-33-2287 0728 E-mail: [email protected] HYDERABAD Mr. M.S.K. Aditya Mobile: 9963253777 301, CONCOURSE, 3rd Floor, No. 7-1-58, Ameerpet, Hyderabad 500 016. Tel: +91-40-23735061, 23737251 Fax: +91-40- 2373 5152 E-mail: [email protected] AHMEDABAD Mr. Animesh Bhabhalia Mobile: 9824029432 907 & 908 Sakar -II, Ellisbridge, Ahmedabad- 380006 Tel: +91-79-26585049/2008/5494, Fax:+91-79- 2648 4924 E-mail: [email protected] BANGALORE Mr. Jayanta Chatterjee Mobile: 9845022459 'The Millenia', Tower B, Unit No. 1004, 10th Floor, Level 2, 12-14, 1 & 2, Murphy Road, Bangalore - 560 008 Tel: +91-80-43326400, Fax: +91-80-43326409 E-mail: [email protected] PUNE Mr. L. Shivakumar Mobile: 9821086490 5A, 5th Floor, Symphony, S. No. 210, CTS 3202, Range Hills Road, Shivajinagar, Pune-411 020 Tel : +91- 20- 25561194, 25560195/196, Fax : +91- 20- 2553 9231 E-mail: [email protected] P a g e |6 ICRA Limited An Associate of Moody's Investors Service CORPORATE OFFICE Building No. 8, 2 Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: [email protected], Website: www.icra.in nd REGISTERED OFFICE 1105, Kailash Building, 11 Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014 th Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231 © Copyright, 2015 ICRA Limited. 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