Improving Economy, Adequate Buffers at Indian Corporates Balance Weakening Profitability

Fitch Ratings-India: Adequate balance sheet buffers and strengthening demand should mitigate pricing and cost pressure at most rated Indian corporates, says Fitch Ratings.

We forecast strong medium-term growth to support demand for India’s steel, cement and chemicals sectors, with improved economic activity boosting power and petroleum product sales. However, medium-term steel prices are likely to moderate due to the industry’s demand and supply dynamics, while cement prices will be pressured by added capacity from large manufacturers over the next few years.

We believe near-term fuel prices will be a function of the government’s efforts to balance fiscal needs, inflationary pressure and the financial health of oil marketing companies. Rising energy prices are likely to pressure the margins of steel manufacturers, auto suppliers, cement producers, chemicals manufacturers and oil marketing companies, despite government intervention to manage surging inflation.
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Meanwhile, the IT services, telecom and pharmaceutical sectors face moderate wage and input cost risks, balanced by high utilisation rates and a better ability than industrial sectors to pass on higher costs to end consumers.

A generally supportive regulatory framework limits exposure to cost inflation for electricity generation companies and network utilities, while strong oil and gas prices will widen margins at upstream companies.