Fitch: Improved Profitability to Boost Indian Corporate Ratings

Mumbai, Dec 22 (PTI) Profit margins of domestic companies are likely to swell by 290 basis points over FY23 levels, boosted by lower raw material costs and rising volume led by local demand, despite faster capacity additions in some industries, which will lead to their rating upgrades next fiscal, says an international rating agency.

In a report on the domestic corporates in particular and the economy in general, Fitch Ratings Friday said it seems the profit margins of the corporates it rates jumping by 290 bps above the FY23 levels.

But it was quick to warn that a sharp or sustained rise in energy prices, given the ongoing geo-political risks, presents downside risks to the projection.

On the economy, it expects the country to be among the world's fastest-growing large sovereigns, with resilient GDP growth of 6.5 per cent in FY25, marginally down from a likely 6.9 per cent GDP print this fiscal.

The higher growth will be buoyed by strong demand for cement, electricity and petroleum products. This along with the rising infrastructure spends will also boost steel demand. Car sales will continue to rise, despite a likely moderation after robust growth in 2023, said the report.

However, slowing demand in the US and the Eurozone is likely to moderate sales for domestic IT services companies and will cap their revenue growth to 7-9 per cent in FY25. But a corresponding easing of employee attrition and wage pressure should underpin higher profitability and solid rating headroom at software exporters.

It also sees IT service companies are likely to generate pre-dividend free cash flow margins of 10-18 per cent on stable operating profits and low working capital and capex requirements.

Refining margins at oil companies are likely to stay above mid-cycle levels in the near term, while lower crude prices next fiscal should support marketing profits.

We believe the structural demand visibility, supply-side reforms and healthier corporate and bank balance sheets will enable a further increase in capex across most sectors.

The agency expects bank credit growth to remain robust in FY25, following double-digit growth in FY24. Banks' rising risk appetite amid a healthy economic outlook and possible interest rate cuts in 2024 should support financial flexibility at the corporate, it added.

Since 2022, domestic corporates have been preferring rupee debt, reflecting the unfavourable pricing dynamics for overseas issuances following steep monetary tightening overseas and higher emerging market risk premiums.