ICRA, a leading credit rating agency, anticipates a slight sequential improvement in the credit metrics of India Inc. for the October-December quarter of 2023-2024. This improvement is expected to manifest in various key indicators, with the interest coverage ratio projected to increase to 4.5-5.0 times in Q3 FY2024 from 4.5 times in Q2 FY2024.
Factors Driving Improved Credit Metrics
The anticipated improvement in credit metrics is attributed to several factors contributing to the enhanced performance of Corporate India. These include:
- Improved Earnings: ICRA foresees improved earnings for Corporate India, driven by the sustained tailwinds from moderating commodity prices and robust demand during the recently concluded festive season.
- Operating Profit Margins: Analysis of the Q2 FY2024 performance of 601 listed companies (excluding financial sector entities) indicates an expected improvement in operating profit margins. This improvement is primarily fueled by a 398 basis points (bps) year-on-year increase and a 64 bps sequential increase, facilitated by the softening of commodity prices.
Impact on Interest Coverage Ratio
The improvement in earnings, coupled with the RBI’s pause on rate hikes, is expected to contribute to a year-on-year enhancement in the interest coverage ratio. This ratio, which measures a company’s ability to service its debt obligations, is estimated to rise to 4.5 times for Q2 FY2024, up from 3.9 times in Q2 FY2023 for ICRA’s sample set companies. However, the ratio remained relatively flat on a sequential basis.
Outlook and Potential Challenges
While the outlook for India Inc.’s performance in Q3 FY2024 appears positive, several potential challenges loom on the horizon. These include uncertainties in the global economic environment, ongoing geopolitical developments, and the impact of persistent food inflation on rural sentiment and related sectors.
According to Kinjal Shah, Vice President & Co-Group Head – Corporate Ratings at ICRA Limited, navigating these challenges effectively is crucial for India Inc. Additionally, as the base effect catches up, the momentum in revenue growth is expected to slow down, with year-on-year revenue growth estimated at 2-4 per cent for both Q3 FY2024 and H2 FY2024.
