India Ratings and Research (Ind-Ra) has maintained an improving outlook on corporates for 2HFY22, as it expects the economic recovery to gain further traction in 2H, backed by the fading impact of the COVID-19 pandemic and favourable financing and external demand conditions. Entities with a strong market share and healthy balance sheet will continue to show strong earnings, although margin may moderate. However, sectors which consume commodities will face challenges in the complete pass-through of input prices. Ind-Ra’s upgrade and downgrade trend highlights strong cash flows in manufacturing and services companies which have aided them to improve credit profiles by deleveraging and reducing debt.

Structural Shifts across Sectors: Ind-Ra opines that most sectors would continue to witness a surge in demand post the second covid wave as they were better prepared than during the first wave. The fiscal and monetary measures have backed economic activities by maintaining adequate liquidity. The entities have learnt to make quick structural changes after the first covid wave and are now better poised to face challenges if subsequent covid waves appear. Furthermore, Ind-Ra expects the Production-linked Incentive scheme in specialty steel to lead to large capex announcements by both large and small steel companies. 

Volatile Commodity Prices Could Pose Challenges to Economic Recovery:
Ind-Ra observes that since the second covid wave, especially during 2QFY22, the risk appetite in system has reasonably improved. This has largely been driven by the strong corporate performance, buoyant external condition and sustained ultra-loose monetary policy conditions. Ind-Ra expects that the financing condition to remain conducive in 2HFY22, backed by the easy money conditions. The agency believes that easy money is a precursor for corporate capex, especially in the aftermath of crisis. However, owing to the tepid domestic demand, large capex activities are still not visible, barring a few pockets. The effect of an ultra-loose monetary policy across the globe coupled with an unprecedented counter cyclical fiscal has pushed global commodity prices at a multi-year high. The initial sign of high commodity prices is visible in the inflation print of various countries, including India. 

Ind-Ra expects continued high commodity prices to boost demand for working capital loans in 2HFY22, therefore, demand for short-term funding could go up. 

Sustained High Commodity Prices and Looming Risk of Supply-side Disruptions:
Ind-Ra expects the sustained pace of rising commodity prices could pose challenges for the financial market, by way of abrupt volatility in key commodity prices such as crude oil. Additionally, elevated commodity prices in the medium term could hurt household demand, unless compensated by higher real income growth. The agency expects commodity-consuming sectors to face challenges in the complete pass-through of input costs, leading to a moderation in margins. 

Liquidity Overhang Continues to Aid NBFCs & HFCs:
Ind-Ra believes that non-bank finance companies (NBFCs) and housing finance companies (HFCs) could witness growth of 10% yoy in assets under management in 2HFY22 with a weakening of disbursements. The agency estimates gross non-performing assets for NBFCs to increase to 7.3% in FY22 from 6.8% in1QFY22 and for HFCs to rise to 3.8% from 3.6%. Ind-Ra believes that diversification in product lines supported by a wider product basket will be key for NBFCs and HFCs to sustain loan growth in a cyclical downturn. HFCs continue to see a demand uptick due to higher consumer affordability, backed by stamp duty cuts in few states, lower interest rates and reverse migration.



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Analyst Names

  • Nikhil Changulani

    Analyst

    02240001700

    Jyoti Chauhan

    Analyst
    +91 22 40356119

    Suparna Banerji

    Associate Director
    9920576160

    Rajan Chavhan

    Analyst

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121