Capex intensity of corporates likely to increase after Lok Sabha polls: India Ratings

Depending on the current trends, various schemes in place and which government comes to power, the rating agency believes the performance of corporates to be robust in 2024-25

The companies are likely to speed up their capex plans after the Lok Sabha results come in as they will analyse their growth drivers, assuming the commodity prices will remain controlled, India Ratings said on Monday.

“Various companies are evaluating their capex requirement going forward. We believe that capex intensity is likely to increase after elections, depending on what the companies see as their growth drivers. We expect there may be a pickup in capex depending on the Lok Sabha election outcome and the level of demand. Expect investment to pick up in FY25,” Arvind Rao, Senior Director, India Ratings & Research said at a press conference.

Depending on the current trends, various schemes in place and which government comes to power, the rating agency believes the performance of corporates to be robust in 2024-25.

“In the current year we expect an increase in profitability, if commodity prices remain controlled. Though the upgrade proportion is likely to reduce and the downgrade to upgrade ratio will increase further. The rating actions will see moderation in FY25,” he added.

Globally, with the likelihood of a hard landing in the US having receded, abating concerns on inflation as well as risks to global growth being broadly balanced, the outlook on global growth for 2024 has been raised to 2.4 percent from 2.1 percent by Fitch Ratings. On the domestic front, Ind-Ra estimates FY25 GDP growth rate to be at a healthy 6.5 percent.

The continued expected healthy economic growth coupled with strong balance sheets of corporates will continue to help sustain the credit profiles.
However, the overhang from rise in real interest rates from earlier monetary tightening remains, the rating agency said.

In FY24, the corporate credit profile continued its robust performance, third year in a row. During this period, the corporate downgrade-to-upgrade ratio was low at 0.37. Infrastructure companies continued to account for one-fourth of the upgrades while the financial sector continued with stability in ratings in FY24. Defaults also remained low at 0.9 percent of the co-operative reviewed ratings in FY24, it said.

Ind-Ra expects healthy banking credit growth at 15.4 percent yoy in FY25, from a revival in private capex benefitting the growth of the corporate segment.

“Financial sector issuers witnessed high stability in their ratings. Positive rating actions were seen with issuers benefitting from strong credit growth, driven by sustained retail and continued corporate credit growth and continued strengthening of balance sheets, it said.

Among the infrastructure sectors which witnessed positive rating actions, majority of the rating actions were from renewable power and road operators, supported by either their capacities coming online or strengthened operating performance during FY24.
The primary reasons that led to positive rating actions were an improvement in the revenue profile and operating performance. Some of the drivers for the strong revenue growth are a spurt in demand for existing products, higher execution of projects amid demand recovery or higher realisations or higher contribution from the launch of new products. Improved product mix or improvement in orderbook or successful completion of capex plan with capacities coming online led to better-than-expected growth in the operating performance.

On the other hand, liquidity mismatches and pressure on profitability were the major reasons for negative rating actions. Liquidity challenges, however, were not due to any systematic disruptions, and were largely from entity-specific issues, while the inability to pass the rise in raw material prices and high competition led to the pressure on profitability.

Corporates in capital goods and auto components saw positive rating actions due to a favourable demand with strong order flow as well as the China plus one strategy. For the auto sector, this can also be evidenced with monthly passenger vehicle sales reaching new highs.

Among consumer services issuers, the hotel sector benefitted from higher occupancy and average room rates while education issuers were supported by an increase in student headcount. Residential real estate players, especially those in the tier-1 premium segment, were supported by significantly better-than-expected presales and healthy occupancy levels.