The likelihood of repeated geopolitical conflicts, uncertainty in commodity prices and increasingly lower odds on interest rates staying higher for longer could squeeze India Inc’s margins, said Ramnath Krishnan, Group CEO of ICRA, tells Gayatri Nayak and Bhaskar Dutta in an interview. Krishnan, a veteran in the financial services industry, said that amid a lack of meaningful pick-up in private sector capex, the saving grace for rating firms has been a slew of big-ticket bond issuances by banks as lenders typically seek out pedigreed ratings for their market instruments. Edited excerpts:
How much of a risk do higher interest rates pose for corporate performance? It seems that globally, rates will stay higher for longer.
It will result in the compression of margins for sure. If you set the clock back by a year, you had a situation where you had high commodity prices around the time when the Russia-Ukraine war started. You had a weakening rupee and higher interest rates. Unfortunately, when these things happen, they all come together, it never comes in isolation. We definitely saw compression as far as margins are concerned.
India Inc, generally speaking, saw growth in the top line, but they saw compression in margins. It’s easy to say people can pass on these costs to the end consumer. But it’s not easy. You might be able to pass on a part of it. But across industries, I don’t think anybody was in a position to pass on 100% of the cost inflation to the end consumer. They had to absorb part of it. And in some cases, it resulted in the compression of margins to the extent of almost about 350 to 400 basis points. And that’s a fairly significant compression.
It’s a business risk. To that extent, none of them is insulated from this risk. But at the same time, I mean, I don’t think people are incapable of managing this risk. They need to manage it sensibly.
Corporate India is deleveraging a lot which means they’re not raising debt from the market. What does it mean for your business?
Yes, they have deleveraged a lot. At present, they haven’t yet gotten back into their capex cycle in a big way. So, it’s not ideal from my point of view. There has been credit growth, but a substantial chunk of that has been for working capital funding. But thankfully for us, what has helped us, is the fact that a lot of banks and large lending institutions have resorted to issuing bonds in the market to beef up their capital, and those have been fairly chunky transactions. So that has been helpful to us. But if the capex cycle from the private sector also starts kicking in, then obviously, we will be in a better place than where we are right now. But what’s helped us in the recent past is the large ticket issuances from some of these large lending institutions. And if it’s a market instrument, you know, typically, the mandates will go to an agency that has some pedigree.
Ratings businesses are deeply intertwined with economic growth. The economy is resilient at the moment but there are global headwinds. What is the outlook for ICRA?
This financial year we are reasonably okay. We just announced the first-half results. So, in the first half, the ratings business grew by about 11%. In terms of revenue, we expect this momentum to continue. I think, this year, by and large, it should be alright. But are we seeing some headwinds slowly surfacing? The answer is, yes. The geopolitical crisis is the biggest. That could put pressure on crude oil. That’s the biggest worry we have.
If anything happens in the Middle East, it could result in a direct impact on crude, crude supplies, and so on. And therefore, that could result in our import basket getting impacted and putting pressure on the rupee and inflationary pressure and hopefully, we don’t get back into a higher interest rate regime to combat inflation.
We’ve just sort of gotten into a situation where the regulator has put rates on pause. But you can hear the narrative, they are beginning to express caution that there could be pressure.
The other expectation that we have is that the spends are likely to taper off a bit because the first half of the year the capex spends that we’ve seen have been largely state-led.
The private sector capex has been almost non-existent. So, the credit growth that we have seen in the first quarter was pretty good. The second quarter was worse. It has been largely bank credit which has gone towards financing working capital, a significant portion of it. Very little has gone towards funding capex.
So private sector capex has yet to kick in. Typically, if you look at the capex pie, the private sector accounts for a significantly larger portion as compared to state capex. State capex will also start tapering off as we are approaching elections. There will be a freeze, there will be an embargo.
Which are the sectors which according to you are on a firmer footing, and where are the risk areas?
We have a positive outlook on banks at present, we have a positive outlook on NBFCs that are into infrastructure funding, and we are positive on hospitality. On telecom towers, we have a negative outlook right now. In most of the other sectors, we have a stable outlook. From a sectoral standpoint, there are fewer sectors where we are seeing challenges at present. In most of the sectors, we have a stable outlook and for a few sectors, where we have a positive outlook, we believe that in the next few years, people should see pretty decent growth in terms of their returns and margins.
