How the pandemic made India Inc more resilient

However, Russia’s invasion of Ukraine and punitive sanctions imposed on the former by US and European countries has the potential to affect India Inc in two ways. One, higher commodity prices can squeeze the margins of downstream sectors, if they cannot pass on input costs. And second, its impact on business activity in that region may affect the development of regions dependent on those markets. Nevertheless, despite the intensity of the second wave of COVID, there has been a vast improvement in credit quality.

The credit ratio (upgrade vs downgrade) of CRISIL Ratings stood at 2.96 times in the first half of 2021-22, from 1.33 times in the previous half. This trend intensified in the second half of the current financial year.

This has been attributed to three factors: first, demand recovery; second, strengthening India Inc’s balance sheet and optimizing its cost structures; and third, accommodative policies and support from government and regulators.

The improvement in demand seen in recent quarters was driven by increased public spending on infrastructure projects, rising exports and domestic consumption. Given the recent budget announcements, these spurs should be sustained over the medium term—the total capital expenditure given by the Center is projected to grow at 14.5% in 2022-23. This, and long-term financial support to states for capital expenditure, should boost medium-term demand in infrastructure sectors.

Recent CRISIL Rating Study of 43 Sectors (of which more than 75% are accounted) 37 trillion rated loans, excluding the financial sector) shows that for 37 the revenues (more than 90% of the loans under study) have fully or largely reached pre-pandemic levels. Only six have any way to go before a full recovery. Companies have weathered two big waves of the pandemic by re-orienting their business models, improving supply-chain and inventory management, cutting costs, and boosting liquidity. Furthermore, a secular demonetization trend, evident across sectors, has continued through the pandemic. This was helped by the planning of lower capital expenditure by the firms.

An analysis of about 4,200 of them (excluding those in the financial sector) assessed by CRISIL shows that as of March 31, 2021, there has been a decline of around 0.7 times as compared to the one time on March 31, 2015.

Contact-intensive and mobility-intensive sectors such as civil aviation, airport operations, education, hospitality, retail and two-wheelers – which were hit hardest by the earlier waves – remained vulnerable.

The war has sent crude oil prices up. This will reduce profit margins in sectors such as oil marketing, chemicals and paints. A protracted war could disrupt supplies of natural gas, crude sunflower oil, crude diamonds and semiconductor chips. A clear picture including the credit quality of the affected companies will emerge only after the geopolitical situation improves.

Broadly speaking, higher input costs and limited space to pass them through will reduce India Inc’s profitability this fiscal. The emergence of new forms and the effects of war remain major risks to our credit-quality outlook.

Then there is the question of size. While large corporates have outperformed – backed by their strong balance sheets and access to funds – micro, small and medium enterprises (MSMEs) have endured the impact of the pandemic disproportionately. They are also vulnerable to current geopolitical risks.

Financial sector entities have a ‘stable’ credit quality outlook, and are expected to see higher growth this financial year and the next financial year. Clearly, the banking sector will play a key role in supporting the budgetary focus on capital expenditure, while the expansion and enhancement of the export credit line guarantee scheme is also credit-growth positive.

The overall asset quality is likely to improve on account of reduction in corporate non-performing assets (NPAs).

However, the performance of the MSME segment and the restructured portfolio is being monitored.

In case of non-banks, the reported gross NPAs should improve.

The recent deferment of implementation of NPA upgradation norms provides a reasonable transition time for non-banks to re-examine collection procedures and educate borrowers to align themselves with the new regime. With the expected recovery in the economy, we expect gross NPAs for non-banks to reduce by 150-200 basis points by March 31, 2022. That said, asset-quality metrics will likely remain sensitive to the performance of the restructured portfolio.

However, most CRISIL-rated non-banks have improved their balance-sheet resilience over the past three financial years, as reflected in the trio of improved capital, provisioning and liquidity buffers.

The structurally beneficial part is that Indian Inc seems to have used the woes of the last two years to become more resilient.

Certainly new risks have emerged, but there is also an anti-fragile sentiment,

Gurpreet Chhatwal is the Managing Director of CRISIL Ratings