Moody’s has stable outlook for non-financial corporates, except telcos

December 14
20:48 2017

Global rating agency Moody’s today said it has a stable outlook for non-financial corporate in the country, except for telcos, on which it has a negative outlook for 2018.

The agency also has stable outlooks for car-makers, and companies in the construction, cement, and textiles sectors, but a negative outlook on the real estate sector.

“Our stable outlook is underpinned by the expectation that GDP growth of around 7.6 per cent will result in higher sales volumes, which along with new production capacity and stabilising commodity prices, will support pre-tax profit growth of 5-6 per cent over the next 12-18 months,” Laura Acres, a managing director at Moody’s corporate finance group, said in a report.

She said further simplification of GST and other structural reforms or improved commodity prices can result in higher operational profit growth, and provide means for deleveraging for some corporates.

The agency has a stable outlook for exploration & production companies, reflecting expectations of stable production volume, low subsidy burdens and stable oil prices.

For refining & marketing, the stable outlook is based on the consideration that capacity additions and higher refining margins will increase earnings, even as marketing margins stay stable.

“While high dividend payments remain a concern, if GST net is widened to petroleum products, it would be a credit positive for the sector,” she added.

Maintaining a stable outlook for base metals, the agency sees improved fundamentals and improving supply side in certain metals supporting stable prices over the next 12-18 months.

The agency expects base metal pricing premia to narrow, although higher production from capacity additions and cost rationalisation measures will drive earnings expansion.

Moody’s also expects steel consumption to grow in the mid-single digits over the next 12-18 months, but lower than the GDP growth of 7.6 per cent, supporting a stable outlook. Consolidation will also rise in the steel sector, it added.

The stable outlook on IT services incorporates the expectation that domestic companies will remain in the forefront in offering IT services to the Western economies, weighed against some of the global challenges, especially in terms of H1B visas and the fast-pace of technology changes that will require investments or acquisitions.

The only sector where it has a negative outlook is telcos, where intense competition and heavy debts continue to pressure cash flows, ultimately driving consolidation activity towards a three player market.

Moody’s domestic arm Icra has a stable outlook for the passenger vehicle industry as it expects in the near and medium term sales to remain robust at 9-11 per cent.

This is despite the fact that spends on product development, including for stricter emission norms especially for diesel companies, will drive a significant part of capex that is expected to be around Rs 30,000 crore over the next two-three years.

Icra has a negative outlook for the real estate sector over the near to medium term as the industry continues to face demand headwinds owing to elevated property prices, a subdued business environment, and regulatory developments like the Rera and GST.

Supply side has seen a reduction in new projects owing to regulatory developments and slowing sales. “Developers are likely to focus on completing current projects and reducing unsold inventory, which along with the moderation in new launches, can reduce the supply overhang over the medium term,” says the report.

Based on current trends, Icra expects demand to recover from the last quarter of this fiscal year onwards, reporting growth of 1 per cent for the full year. It expects demand growth to improve to 4-5 per cent in FY19 and to 6-8 per cent in FY20 and FY21.

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