Operating Environment for Corporates to be Less Challenging in FY15: Icra

Mumbai: With recent stability on the macroeconomic front, the operating environment for the corporate sector is likely to be less challenging in the current fiscal year (2014-15), according to a report by rating agency Icra.

"The operating environment for the domestic corporate sector is likely to be less challenging during FY15 than it had been in the previous year, considering the emerging signs of stability in the macro-economic indicators and the likelihood of some improvement on the growth front," Icra said in the report.

Current account deficit improved to 1.7 per cent of GDP in first quarter FY15 from 4.9 per cent in FY14.

Retail inflation or CPI too has come down from the peak of 11.2 per cent in November 2013 to 6.46 per cent in September, although it still remains outside the comfort zone of the Reserve Bank of India (RBI) to mull bringing down interest rates.

"Moreover, several policy initiatives including efforts to revive stalled projects, tariff revision by state utilities, re-scheduling of premium payout for road projects alleviate some sector-specific concerns," the report said.

In the previous fiscal year, due to slowing economic growth and rising costs, the latter on account of higher power and fuel expenses, operating profit margins (EBITDA margins) across many sectors continued to deteriorate.

The rating agency said that out of 20 sectors within its sample, only three sectors witnessed improvement in Ebitda margins during FY 2014, while eight sectors reported relatively stable margins and balance nine sectors experienced contraction in margins.

The tepid macro-economic situations, corporate earnings slowdown, credit defaults, rating downgrades, increase in NPAs of banks, rise in the proportion of restructured assets and incidences of corporate debt restructuring (CDR) were clearly on display over the last couple of years as initial stress propagated more stress, the Icra report noted.

The credit ratio, defined as the ratio of number of credit rating upgrades to downgrades, of Icra-assigned ratings had touched a low of 0.3x in 2012-13 as most of rating actions factored in further deterioration in performance of companies in 2013-14.

However, in the first quarter of this fiscal year, credit ratio of Icra-rated portfolio of entities crossed 1.0x for the first time since FY11, the report said.

The rating agency further said considering the high intensity of rating downgrades during the period 2011-14, it expects some improvement in rating actions during the current fiscal year.

"While a significant turnaround is unlikely, some of the sectors which reported low credit ratio during the last few years - infrastructure, cement, capital goods, hotels, auto ancillaries - are likely to witness moderation both in the number and severity of rating downgrades," it said.

The fact that some of the highly leveraged entities are making efforts to monetise their assets and are more cautious while bidding for new projects marks a positive development from a credit perspective, it said.