Ind-Ra: Fall in Operating Performance of Weak Entities to Drag Down Overall EBITDA Recovery in FY18

India Ratings and Research (Ind-Ra) does not expect a broad-based recovery in FY18, given decelerating EBITDA growth of corporates with weak operating performance. Corporates with strong financial profiles are likely to witness a marginal positive EBITDA growth in FY18 (9MFY17: 6%; FY16: 8%) compared with corporates with weak financial profiles (EBITDA growth: 9MFY17: negative 19%; FY16: negative 22%), which are likely to witness a significant decline in EBITDA growth in FY18.

EBITDA Growth of Top 365 Corporate Borrowers in FY18

Ind-Ra expects FY18 earnings (EBITDA) growth of the top 365 corporate borrowers (excluding public sector units and banking and financial services providers) to be 9%-12%, driven by a slow but improving consumption and a recovery in exports. The level would be the highest since FY15 (8%). Therefore, the number of corporates showing an improvement in operating performance is likely to be higher than that in FY17. Ind-Ra expects FY17 EBITDA growth to be lower than the previously estimated 5%-6% owing to demonetisation in 4QFY17. However, the impact of demonetisation is likely to be transitory on the FY18 corporate performance.

Sectoral Outlook Indicates Divergent EBITDA Growth

Ind-Ra's expectation for FY18 remains in line with the FY17 trend. The agency expects the EBITDA growth of capital-intensive- and commodity-linked sectors, including infrastructure and power, to decelerate in FY18.

The steel sector registered positive EBITDA growth for 9MFY17, driven by an increase in commodity prices and base effect. Ind-Ra expects the steel sector's profitability in FY18 to remain under pressure, as companies' ability to fully pass input prices to customers would be limited owing to muted demand and overcapacity.

Meanwhile, the telecom sector registered flat EBITDA growth for 9MFY17. Ind-Ra expects the sector's EBITDA growth to decelerate in FY18. Ind-Ra has a negative outlook for the telecom, steel, power and infrastructure sectors for FY18.

In the oil and gas sector, downstream companies could witness a moderation in EBITDA margin in FY18 on an increase in crude prices. On the other hand, upstream companies are likely to benefit from benign prices. However, the agency expects consumption- and export-driven sectors such as pharmaceutical to register positive EBITDA growth for FY18.

The auto sector's EBITDA growth in FY18 is likely to moderate. Meanwhile, automotive suppliers are likely to benefit from an increase in commodity prices and an improvement in exports. Ind-Ra has a stable outlook for the auto and automotive supplier, oil and gas, and pharmaceutical sectors for FY18.

Divergent EBITDA Growth Trend Reflected in Rating Categories

EBITDA growth decelerated across the rating categories. However, it remained positive for the majority of investment-grade issuers (rating scale of 'IND BBB-' and above) in 9MFY17. Nearly 70% of the total number of investment-grade registered positive EBITDA growth over FY14-9MFY17. On the other hand, a large number of non-investment grade issuers (rating scale of 'IND BB+' and below) registered negative EBITDA growth in at least three of the last six years. Nearly 60% of the total number of non-investment grade issuers recorded a negative EBITDA growth over FY14-9MFY17. Thus, any meaningful recovery would be conditional on a strong economic recovery or structural changes such as consolidation, deleveraging and non-performing asset resolution.

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