India Inc s Credit Metrics To Show Sequential Improvement In Q2FY24 Icra

The rating agency Icra expects the credit metrics of India Inc. to show sequential improvement from now on, to 4.5 to 5.0 times in Q2FY2024 from 4.5 times in Q1 FY2024, given the recent trends in softening of commodity prices, general price hikes taken by companies, and anticipation of a favourable demand outlook. 

The year-on-year (YoY) revenue growth is estimated at four to six per cent and two to four per cent, respectively, for Q2 FY2024 and H1 FY2024. 

Kinjal Shah, Vice President and Co-group Head, Corporate Ratings, Icra said, “India Inc. started FY2024 on a positive note, with a notable margin improvement. The sequential improvement in operating profit margin (OPM) was most visible in aviation, oil and gas, retail, and automotive OEMs.”

Shah added that while the stabilisation of commodity prices and other input costs over recent months can support further improvement in operating profit margin (OPM), uncertainties remain due to the evolving geo-political situation. 

“Hence, India Inc.’s ability to improve earnings will depend on its ability to navigate ongoing headwinds such as tepid growth in the developed markets and impact of fluctuations in foreign exchange on both import as well as export-oriented sectors,” Shah mentioned.

Despite the improvement in OPM, multiple rate hikes taken by the Monetary Policy Committee (MPC) in the recent past, resulting in higher finance costs, had a bearing on the interest coverage ratio for the quarter, Icra stated.

Notably, the interest coverage ratio of Icra’s sample set companies, adjusted for sectors with relatively low debt levels (IT, FMCG, and pharma), weakened in Q1 FY2024 to 4.5 times from 5.2 times in Q1 FY2023. 

Following an extended pause anticipated from the MPC and an expected revival in earnings, India Inc.’s interest coverage is likely to improve to 4.5 to 5.0 times in Q2 FY2024 from 4.5 times in Q1 FY2024, although inflationary trends remain monitorable.

The rating agency’s analysis of the Q1 FY2024 performance of 591 listed companies (excluding financial sector entities) revealed expectedly improved OPM performance, increasing by 61 bps and 105 bps on a YoY and sequential basis, respectively. 

“This was primarily aided by softening in commodity prices, coupled with a favourable demand situation. However, while the input costs softened in recent months, they remain higher compared to the historic levels, and accordingly, India Inc.’s OPM is yet to revive to its historic highs,” Icra said.

While India Inc.’s revenues showed a moderate 3.8 per cent YoY growth during the quarter, aided by general price hikes taken by companies in select sectors, the revenues contracted by 4.5 per cent sequentially due to moderation in realisation levels in a few sectors (as a fallout of the softening in commodity prices).

In terms of YoY performance, sectors such as construction, hotels, automotive, and cement reported growth in revenues due to successive price hikes and stable demand, while commodity-oriented sectors like metals and mining, oil and gas and fertilisers and a few others like power witnessed a sequential decline in revenues during the quarter.

Shah asserted, “While revenue growth is anticipated to continue into Q2 FY2024, aided by expected stable demand and the start of the seasonally-strong festive period, the ability of Corporate India to sustain the same remains to be seen, given the macro-economic uncertainties, and impact of inflation on the demand momentum.”