Reforms likely to improve India’s sovereign credit profile: Moody’s

By Ishaan Gera

  • 13 May 2015

Rating agency Moody's reinforced its confidence in Indian corporates while emphasising that the current pace of reforms will enhance growth of the economy. "More than a quarter of all corporates rated by Moody's carry positive outlook," the rating agency said while highlighting that reforms launched by the Indian government will improve sovereign profile over the next several quarters. 

Moody's had revised India's rating outlook from stable to positive last month while affirming government of India's Baa3 issuer and senior unsecured ratings. The rating agency expects Indian economy to outperform its peers growing at 7.5 per cent as macroeconomic challenges ease further in the coming months. 

While India has been able to contain its current account deficit and inflation, some structural challenges still persist which can only be tackled once infrastructure, regulatory and bureaucratic reforms are implemented by the government, it said in a press release.


Moody's pointed out that weak domestic demand and credit conditions would limit the pace of recovery in India over the next two quarters. The credit growth for last fiscal dropped to single digit and the situation is unlikely to improve in the short run as banks are still reluctant to lend due to rising NPAs. Corporates have had a dismal performance over the past year with earnings remaining unimpressive for most of them. But despite the shocks to the Indian corporate, Moody's still accorded them a positive outlook. 

"Twenty-six percent of all corporates that Moody's rates in India carry positive outlook, 70 per cent carry stable outlook, leaving only four per cent with negative outlook," said Philipp Lotter, Moody's managing director for the corporate finance group.

The report also pointed to PMI data indicating that the cyclical pick-up in economic activity is underway while emphasising that the trends in capital goods production and commercial vehicle sales point to a gradual bottoming out in India's capex cycle. 


"Debt levels are stabilising for Moody's-rated Indian corporate and infrastructure issuers. We expect debt to EBITDA to stabilise at 2.8x in 2015 because an upswing in earnings on the back of a recovery in economic activity and improving margins should help shore up key credit metrics for Indian corporates," Moody's said. 

While the government is trying to push reforms, a lot would depend on its ability to implement them. With the current track record of the government and the constraints it faces in implementation of the land acquisition bill, it will be an uphill task to implement labour and other reforms. 

The report by Moody's highlighted that industrial, transport, infrastructure, metals and automotive sectors will benefit the most.


"However, issuers in the upstream oil and gas, and chemicals sectors will see earnings and cash flows pressured by weak oil prices globally,” the press release stated. 

"Fuel availability, delays in project approvals, lack of funding and loss of momentum in policy implementation will be some of the

factors holding back Indian corporates," Lotter said.


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