Indian Corporates’ Large Capex Will Need Offshore Funding Amid Steady Economic Growth

Moody’s Ratings (Moody’s) in a report has said India Inc.’s large capex needs will still rely on offshore funding despite improving domestic liquidity and companies’ earnings growth. Icra, a Moody’s affiliate in India also stated that despite higher capex, Indian companies’ credit metrics will remain stable amid easing inflationary pressures and steady interest rates

Moody’s added that capacity expansion, inorganic growth, refinancing and working capital needs, along with shareholder payments, will keep capital requirements high for nonfinancial corporates in India. “While India’s domestic liquidity and companies’ internal cash flow can largely cover their capital needs, offshore funding will remain key despite its share reducing to 12 per cent of India Inc’s total funding due to its higher costs and rising domestic liquidity,” said Vikash Halan, Managing Director (MD), Moody’s.

Moody’s believes nonfinancial corporates will face stiff competition from the retail sector for bank funding as retail loans face high demand and have higher yields relative to corporate loans. At the same time, India’s growing domestic bond and equity markets still comprise a small share of companies’ funding, at only 12% over the past decade on average.

It considers that Indian corporates can incur additional debt to meet funding needs. Over the past decade, the corporate sector has steadily cut debt to 55 per cent of gross domestic product (GDP) from 72 per cent while leverage has remained stable.

Meanwhile, Icra noted that the Indian corporate sector saw steady business momentum in the fiscal year (FY) ended 31 March 2024, supported by both consumption and investment activity. Still, rural areas have so far faced subpar monsoons and inflationary trends that have dampened consumption. Conversely, urban-focused businesses such as residential real estate, hospitality, airlines, jewellery and automobiles have continued their robust momentum.

“Despite the likely higher debt, India Inc. will continue to report stable credit metrics due to stabilising inflationary pressures and a steady interest rate regime. The forecast of a normal monsoon season should support a nascent recovery in rural markets,” says K. Ravichandran, Chief Ratings Officer, Icra.

It expects the pace of private sector capex to be moderate in the first half of FY2025 due to the likely pause in infrastructure activities before the general elections. Over the near to medium term, however, private capex will ride on a general uptick in macroeconomic activity, as well as several supportive policy measures such as the Production Linked Incentive schemes.

The rating agency expects select sectors to face a stronger uplift in capex such as metals, specialty chemicals and automotive due to expansion plans and strong demand. Likewise, the regulatory push for a greener environment will spur investment in related infrastructure.

Still, global macroeconomic risks pose challenges, especially for export-oriented sectors such as bulk chemicals, cut and polished diamonds, as well as textiles.