Indian rated corporates are as well placed as any in the region. This is due to strong underlying growth and accommodative balance sheets. S&P Global Ratings estimates aggregate EBITDA in fiscal 2024 will be about 50% higher than five years back for rated companies. Yet aggregate debt is hardly changed.

A supportive factor is India's economic growth, which is the highest in the region, at 6.0% for 2023 and 6.9% in 2024, by our forecasts. A growing economy can paper over some cracks, such as the impact of China's reopening, which could create price competition for steel and chemicals producers. Despite tough offshore funding conditions, companies have easily tapped onshore financing.

We expect limited rating upside, however, given the improvement in credit quality is reflected in our base case assumptions. Some 85% of our ratings on India-based corporate and infrastructure entities have a stable outlook. That said, financial profiles are strengthening within current rating categories.

Earnings Outlook Is Positive Across Most Sectors

Solid earnings momentum over the next two years, by our forecasts, will make for one of the healthiest four-year stretches seen in a while (see chart 1).

Rising domestic demand and sector-specific recovery are more than offsetting negatives, including tough global economic conditions and higher policy and borrowing rates. For the 35 corporate and infrastructure entities we rate in India (this includes some confidential ratings), we forecast average EBITDA growth of about 10% in fiscal 2024 (year ending March 31, 2024), outpacing GDP growth.

Chart 1

Table 1

Earnings growth is coming mainly from higher margins in some sectors. This is driven by:

• Lower input prices--especially commodity sectors, excluding downstream energy, which will see a reversal in margin squeezes from last year's rise in raw material prices. Beneficiaries include steel.
• Increased volumes in sectors such as auto where volumes are normalizing with the easing in chip supply;
• Higher usage, especially data, in telecom. Consumers are in good shape--a growing middle class and improving affordability is positive.
• Higher non-aeronautical revenues led by increased consumer spending in the airport sector.

We expect below-average earnings growth for information technology earnings. Downstream energy will be among the few sectors with weaker earnings, given a declining pricing environment.

Balance-Sheet Management Will Stay Strong

We expect debt reduction to remain a focus for many rated companies, though the pace of deleveraging will slow. Financial discipline aided by strong operating cash flows led to significant deleveraging in Indian corporates over the past three years.

Working capital needs will fall as input costs ease, especially in the commodity, chemicals and auto sectors. This will also support cash flow generation.

By our forecasts, the median debt to EBITDA for our rated portfolio (excluding debt-free IT companies and infrastructure/utility companies that typically have higher leverage) will fall to about 2.4x by March 2024 from about 2.7x the year before. This is a significant decline from 4.3x as of March 2020.

Leverage for infrastructure/utility entities is likely to decline to about 5.2x by March 2024 from our estimated 6.3x as of March 2023. This is driven by a higher earnings base, rather than debt reduction. Rated infrastructure and utility companies are unlikely to deleverage below 5.0x given capex funding at 70:30 debt to equity mix.

Chart 2

Tata Steel Ltd., Tata Motors Ltd. and Bharti Airtel Ltd. are likely to deleverage the most in fiscal 2024, benefitting from strong free cash flow generation. Tata Motors also looks set to reduce debt through asset monetization, with the proposed listing of Tata Technologies Ltd.

Renewable energy companies will continue to have the highest leverage. For those players with aggressive growth capex, debt-to-EBITDA ratios will remain over 6x. We expect deleveraging to be limited because the intermittency of renewables is driving many players into pumped storage and round-the-clock power projects, and these have longer gestation. Nonetheless, improving business profiles due to scale and resource diversity has garnered more resilient cash flows.

Steadily Rising Capex Is Backed By Stronger Cash Flows

Aggregate capex is about a third higher than the pre-COVID high in fiscal 2019. By our forecasts, capital expenditure for the rated corporate portfolio will increase on average by 12% in fiscal 2024

Increased capex is supported by stronger operating cash flows. Fiscal 2024 capex as a percentage of EBITDA is lower than that in fiscal 2019 (see chart 3). The current capital-spending cycle is not denting balance sheets--unlike 2017-2020. This is due to stronger operating cash flows and, in some cases, deleveraging initiatives undertaken in the past two years.

Chart 3

Sectors with above-average capital expenditure include infrastructure, utilities, steel, telecom and auto.

• Tata Steel is completing a facility with capacity of 5 million tons per annum (mtpa). It plans to add an additional 15mtpa of capacity after the completion of this project. Other domestic steel companies are adding sizable capacity as well.
• Bharti Airtel and Reliance Industries are investing in 5G capabilities. While we expect a steep increase in capex for Bharti in fiscal 2024, we believe it should decline in subsequent years.
• Tata Motors is increasing capex both in India and in Jaguar Land Rover Automotive PLC (JLR). In India, the company's capex will likely increase about 30% to Indian rupee (INR) 80 billion in fiscal 2024, driven by investments in the electric-vehicle business. JLR's capex is likely to increase to about GBP3 billion from about GBP2.5 billion, as part of its articulated transition strategy.
• Oil and Natural Gas Corp. Ltd. (ONGC) will likely step-up investments in renewable energy and diversify its petrochemical business starting fiscal 2025. With total investments of about INR1.5 trillion on these projects, the company aims to reach 10 gigawatts of green-energy generation by 2030 and net zero for scope 1 and 2 emissions by 2038.

Rated infra and utilities have typically larger spending needs

The capex cycle for rated infrastructure and utilities companies will likely peak in fiscal 2024 with spending expanding about 27%. This coincides with the commissioning of several contracted projects for renewable players and the completion of the Teesta hydro asset acquisition by Greenko Energy Holdings. We expect capex to decrease over the subsequent two years, barring new pipeline projects or large investments in the growing green hydrogen space. Moreover, capex requirements for rated airports will reduce significantly from past few years with the completion of their terminal expansion in fiscal 2024.

India's Growing Resilience To External Volatility

Strong operating cash flow and onshore liquidity mitigate challenging offshore market conditions. Less than 10% of our rated corporates are assessed to have weak or less than adequate liquidity. This includes Vedanta Resources Ltd.. The company's liquidity position is strained by the US$3.2 billion of bond maturities over the next 18 months.

Chart 4

Chart 5

Rated Indian corporates, apart from utility and infrastructure entities, have had limited funding needs given that about half of them are free cash flow positive. While about two-thirds of utilities and infra entities are free cash flow negative due to growth-related spending in the past year, funding has been available for projects with good cash flow visibility.

Companies are comfortably funding through the banking system and the onshore bond market. The cost of onshore debt has not increased as much as for offshore debt. Funding has also been available in larger sizes than before, with the equivalent of benchmark-sized U.S.-dollar issues becoming more common.

Several companies have also redeemed maturing offshore bonds without accessing the capital markets. We expect strong onshore and alternate funding sources (including private markets) to support credit profiles of corporate India at least over the next few quarters.

Table 2

Operating, financing and liquidity conditions are emblematic of the India Inc. story at the moment. The country's corporates are more resilient to external turbulence compared with past periods of elevated commodity prices, weak global growth, and a strong dollar. We expect this trend to stay on track for the foreseeable future.

Table 3

Appendix

Chart 6

Chart 7

Chart 8

Editor: Cathy Holcombe

Digital design: Evy Cheung, Tim Hellyer

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