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India Ratings and Research (Ind Ra) forecasts a muted demand for industrial credit from corporates with capital expenditure (capex) plans due to various factors, including strong cash flows and the ability to tap equity markets. This trend is expected to keep corporates' financial leverage low, with credit growth driven mainly by working capital cycles and potential inorganic opportunities.
During the ongoing cycle, corporates are exhibiting better risk management practices compared to the previous debt capex cycle (FY10-FY14), avoiding excessive leverage buildup. This cautious approach is likely to support the credit cycle, although heightened competition among lenders and investors may lead to risk misallocation.
According to Ind Ra, robust cash flows and a buoyant equity market have reduced credit demand from corporates, allowing financial entities to access financing channels easily at favorable rates. While industrial credit demand may remain subdued in the near term, investments in emerging sectors like alternative energy and manufacturing process re-engineering are expected to require substantial bank financing in the medium term.
Comparing cash flow generation and capex between FY19-1HFY24 and FY10-FY14, Ind-Ra observes stronger cash flow generation abilities among corporates in recent years, providing ample cushion for capex requirements. Unlike FY10-FY14, corporates are now raising more equity capital than debt, indicating a preference for equity over leverage.
Ind-Ra's analysis of the financial statements of listed corporates reveals limited cash outflows for working capital and debt servicing, ensuring sufficient cushion post-capex, dividends, and buybacks. However, corporates in the 251 and above revenue bucket may face challenges due to rising debt costs and extended working capital cycles.
Large corporates, with robust cash flows, have reduced incremental borrowings on a net basis, prioritizing capex, buybacks, and dividends. Ind-Ra expects this trend to persist, although a moderate increase in credit demand is anticipated.
While large corporates' credit offtake has grown modestly at a compounded annual growth rate (CAGR) of 2.3 per cent from FY14 to FY24, the MSME sector is expected to witness higher borrowing activity driven by factors like lower cash accruals and increased working capital needs.
Overall, Ind-Ra underscores the evolving credit landscape, emphasizing the cautious approach adopted by corporates amidst changing market dynamics and the potential for increased credit demand in specific sectors like MSMEs.
