One in four domestic companies carry positive credit outlook: Moody's

Amid increasing worries over the rising unhedged external debt of corporates, global rating agency Moody's today said that 26% of the domestic firms carry positive credit outlook and 70% have stable outlook.

The country's external debt stood at $462 billion as of December 2014, out of which 80.5% were non-government debt, according to the Finance Ministry data.

Over 35% of the external debt of private corporates are unhedged, according to bankers and analysts.

"Twenty-six per cent of all corporates that Moody's rates in the country carry positive credit outlook, 70% carry stable outlook, leaving only 4 per cent with negative outlook," a managing director at Moody's corporate finance croup Philipp Lotter said here today during the agency's first annual credit conference here.

These companies are in the non-financial and infrastructure space, the agency said, adding over the next 12-18 months, their credit profile should improve on the back of an uptick in economy which is likely to grow at around 7.5%.

On a weighted average basis, Moody's expects the debt-to Ebitda of these corporate to stabilize at 2.8 times this year as he expects an upswing in earnings following a likely pick up in the economy which will also help shore up key credit metrics for corporate.

It can be noted that rising fund raising through ECBs, and also the jump in NRI deposits pushed up external debt to $462 billion as of December 2014, up up 3.5% from the March levels, according to the government data released end March.

Of this, the share of government debt stood at 19.5% and the rest 80.5% were non-government debt. But as percentage of GDP, the overall external debt level improved to 23.2% from 23.7% in March 2014. 

Lotter, however, warned that structural challenges persist, and in particular, the government's ability to push through the new land and GST Bills will be crucial in maintaining positive policy momentum.

He said that most of the positive outlooks are on the ratings of government-related issuers and so linked to the recent changes in the sovereign outlook to positive.

However, broader improvements in credit conditions for the corporates will also be due to an upturn in economic growth, banks' pass-through of interest rate cuts, weak global commodity prices, and pro-growth policy agenda of the Modi government which is completing a year in office this month.

Sectors that will benefit the most include industrials, transport infrastructure, metals and automotives.

However, issuers in the upstream oil and gas, and chemicals sectors will see their earnings and cash flows pressured by weak oil prices globally, he said.

Lotter further said the latest economic data suggest that a cyclical pick-up in economic activity is underway, as the purchasing managers' indices for the manufacturing and services sectors are expanding. In addition, leading investment indicators like capital goods production and commercial vehicle sales point to a gradual bottoming out in the capex cycle, he added.

It can be noted capital goods have been expanding at over 15% on an average in the past six months, it can be noted, while manufacturing has been limping.

Noting that many stubborn macroeconomic challenges have also eased significantly, Lotter pointed to the continued fall in consumer price inflation in recent months, and a massive improvement in the current account balance, which is pegged at 1.1 per cent of GDP in FY15 and is projected to be around 0.9 per cent this fiscal.

"Reduction in both inflation and current account deficit provides a more stable backdrop for corporates in terms of market borrowing costs and the exchange rate," Lotter said.

On the weak commodity prices, he said the historically low prices are generally credit positive as operating costs will be lower for sectors like automotives, manufacturing, infrastructure and power.

On leverage, he said debt levels are in general stabilising for these corporate and infrastructure issuers.