ICRA RESEARCH SERVICES
Corporate Ratings
Indian Corporate Sector – Trends & Outlook
RATING FEATURE
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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]
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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.
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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.
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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
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CHENNAI
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Mr. Leander Rayen
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KOLKATA
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Mobile: 9007884229
A-10 & 11, 3rd Floor, FMC Fortuna,
234/ 3A, A.J.C. Bose Road,
Kolkata-700020.
Tel: +91-33-22876617/ 8839,
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HYDERABAD
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Hyderabad 500 016.
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AHMEDABAD
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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]
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ICRA Limited
An Associate of Moody's Investors Service
CORPORATE OFFICE
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