Improving Operating Environment Drives Stable Outlook for Indian Non-Financial Corporates

Moody's Investors Service says the outlook for Indian non-financial corporates is stable, driven by economic recovery and political stability.

"We changed the outlook for Indian non-financial corporates to stable from negative, reflecting our view that economic recovery, enhanced access to the global capital markets and successful implementation of pro-market policies will lead to improved corporate cash flows and be broadly supportive of business growth," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

Improved external vulnerability should also reduce foreign-exchange risk for Indian corporates, despite gradual interest rate normalization by the US Federal Reserve.

"We expect 5.6% GDP growth in India (Baa3 stable) for the fiscal year ending March 2016, led by an acceleration in manufacturing activity," adds Halan.

Halan was speaking on the release of Moody's 2015 outlook for Indian non-financial corporates. The outlook reflects Moody's expectation for fundamental business conditions in the sector over the next 12 to 18 months.

Moody's outlook states that Indian corporates' key financial metrics will weaken in 2015, but the pace of leverage growth will moderate as corporate earnings continue to improve. Higher equity markets and asset valuations will also support deleveraging.

Moody's changed the outlooks on the refining and marketing, steel, metals and mining, and automotive sectors to stable from negative to reflect the broad-based improvement in growth prospects for companies in those sectors,despite lingering challenges.

Recent energy reforms have also improved overall credit availability for the corporate sector. As a result, Moody's outlook is stable across key industries.

In the exploration and production sector, India's gas price hike will boost the revenues of upstream players, although the fall in crude oil prices will hurt profitability.

The regional refining margin will remain weak, but recent energy reforms to lower fuel subsidies will reduce the borrowing requirements of refining and marketing companies.

Demand for steel will pick up gradually, but we expect production growth to keep its pressure on prices and margins. The broader metals and mining sector continues to be affected by mining bans and regulatory issues. Demand for new vehicles will also remain weak across most segments in 2015, limiting sales for automotive companies.

Moody's would change the outlook to positive if government measures that unlock GDP growth beyond 7% led to a broad-based improvement in credit metrics, or if domestic interest rates were reduced amid easing inflation, leading to an improvement in corporate cash flows.

Moody's would change the outlook back to negative if annual GDP growth fell below 5% and led to a steep deterioration in credit metrics, or if higher interest rates brought on by rising inflation and/or exchange rate volatility resulted in a tight funding environment.

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