India's Domestic-Oriented Sectors More Exposed to Credit Risks, Says Moody's

Moody's Investors Service says that its overall outlook for India's non-financial corporates in 2014 is negative because of the country's weak economy, political uncertainty and the expected gradual scale back of quantitative easing by the US Federal Reserve.


"In particular, our outlook is negative on many domestically focused sectors or sectors that are exposed to the vagaries of regulation and policy-setting. By contrast, our outlook is largely stable on sectors that are more exposed to international trade flows or to exports," says Vikas Halan, a Moody's Vice President and Senior Analyst.


Moody's analysis is contained in its just-released report titled "India Non-Financial Corporates: Weak Economy, Political Uncertainty and Fed Tapering Cloud Credit Outlook."


"Lower economic growth, volatile exchange rates, rising borrowing costs, tighter lending and monetary conditions and slow economic reforms have dampened prospects across many sectors," says Anjan Ghosh, a Senior Group Vice President at ICRA.


According to Moody's report, India's GDP growth should remain weak, at 5.5% in the fiscal year ending March 2015, as elections due in the next three months will delay reforms needed to revive growth. In addition, the rupee will remain volatile, making the operating environment more challenging for importers and exporters.


"In terms of specific sectors, our outlook is negative for the refining and marketing sector. We expect refining margins to stay weak and for companies to suffer delays in subsidy reimbursements due to the upcoming elections," says Halan.


Halan adds that Moody's outlook is also negative for the steel, metals and mining sectors, because the weak economy and capacity expansions will weigh on the margins and utilisation rates of steelmakers.


"In addition, the weak economy and tight monetary policy will pressure the credit profiles of companies in sectors such as cement, real estate, retail and automotives," says Subrata Ray, a Senior Group Vice President at ICRA.


By contrast, Moody's outlook for the auto components sector is stable, as such firms are likely to control costs and arrest the decline in their margins in 2014.


Moreover, Moody's outlook for the exploration and production sector is stable, as a near doubling of gas prices from April 2014 will lift upstream revenues. However, the fuel subsidy burden on upstream companies could remain high, despite Moody's expectation of a decline in total fuel


Moody's report says the outlook for the IT/business process outsourcing sector is stable because the weaker rupee has improved the industry's competitiveness.


"Our outlook on the pharmaceutical sector is stable, because the industry will be supported by patent expiries in the US, a strong product pipeline from Indian generic companies and robust domestic demand," says Ghosh.


As for the telecommunications industry, Moody's report says average revenues per user and EBITDA margins should improve, resulting in a stable outlook for the sector.


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