A tight credit environment, says S&P

Some Indian companies with high leverage and persistent negative free cash flows would be susceptible to funding and liquidity challenges over the next 12-18 months, said S&P Global Ratings in a report “India Corporate Credit Outlook: Slow Growth Exposes Leverage Hotspots”.

A tight credit environment is amplifying the impact of structurally lower private consumption. This is likely to mute earnings growth across most sectors of corporate India relative to historical levels, said the report published on 27 August 2019.

“We expect Indian corporates to grow earnings by 7%-8% annually over the next two years, down from the double-digit growth of the past two years despite the recent stimulus announcement aimed at encouraging foreign investment, auto demand, and bank lending,” said S&P Global Ratings credit analyst Krishnakumar Somasundaram.

Indian corporates are growing slower than in the past, but still faster than listed peers in the region, owing to their lower share of the organized economy and per capita consumption in India.

“Although the median leverage for the Indian companies in our sample is modest and declining over time, this doesn’t translate as well into free cash flows, with 40% of our sample showing marginal or negative free cash flows,” he said.

A subset of 190 corporates in S&P sample of 1,330 listed companies is susceptible to funding and liquidity stress. These companies tend to be small or midsize firms belonging mainly to construction, steel, textile, and real estate sectors.

These companies have poor debt coverage metrics and continue to roll over large amounts of short-term debt in a tight credit environment, said the report. fiinews.com