FMCG, Pharmaceutical Formulations Likely To Perform Better Than Expectations: Crisil

Crisil Ratings has said that fast-moving consumer goods (FMCG) and pharmaceutical formulations are expected to perform better than previous expectations. The FMCG sector is supported by a recovery in rural demand, led by better monsoons and easing inflation. 

For pharmaceutical formulations, revenue growth this fiscal will be aided by improved realisations in the US generics market and the sustained volume uptick expected from new product launches.

Four corporate sectors— specialty chemicals, agrochemicals, textile cotton spinning and diamond polishers — which we had called out as facing headwinds from global macroeconomic conditions six months ago, remain constrained. However, they continue to have strong balance sheets, it added. 

Only one corporate sector — automobile dealers — is affected by relatively high leverage due to a recent significant build-up in passenger vehicle inventory. “All the 12 infrastructure assets are expected to have stable debt-protection metrics while maintaining the revenue growth momentum,” it mentioned.

The financial sector (banks and non-banks) has strong credit quality, supported by steady credit growth, healthy capitalisation and stable asset quality. For banks, credit growth is expected to remain healthy at 14 per cent this fiscal, despite moderation from 16 per cent last fiscal. The revision in risk weights on lending to some of the faster-growing segments is driving the moderation in credit growth. The ability to mobilise cost-effective deposits continues to be a key monitorable. 

Asset quality metrics are likely to remain benign with gross non-performing assets expected to touch another decadal low. While net interest margins are set to compress 10-20 basis points this fiscal, low credit costs will support banks’ profitability.

For non-banks, growth in assets under management may moderate to 17 per cent this fiscal from 20 per cent last fiscal, as they recalibrate growth strategies in the unsecured loan book. Traditional segments are expected to expand at a steady pace. The asset quality of microfinance loans is showing early signs of stress and, hence, credit costs are likely to increase.

Lower ticket size segments of unsecured personal loans also bear watching given their higher growth and inherently vulnerable borrower segment. On the funding front, non-banks were able to diversify resource mobilisation avenues beyond bank loans during the first half of this fiscal. Adherence and adaptability to an evolving regulatory landscape remain critical as well.

Somasekhar Vemuri, Senior Director, Crisil Ratings stated, "The positive credit quality outlook on India Inc is largely led by government infrastructure investment and private consumption, also reflected in the healthy GDP growth expected this fiscal. Particularly, the expected decline in interest rate will support domestic demand as inflationary pressures subside. However, we remain watchful of the impact of heightened geopolitical risks on India’s export-oriented sectors and supply chains.”

The Crisil Ratings credit ratio, or the proportion of rating upgrades to downgrades, increased to 2.75 times in the first half of this fiscal from 1.79 times in the second half of last fiscal. This highlights the sustained strengthening of India Inc’s credit quality.

Overall, there were 506 upgrades and 184 downgrades. The annualised upgrade rate of 14.5 per cent outpaced the average of ~11% for the past decade, while the downgrade rate of 5.3  was lower than the 10-year average of 6.5 per cent . Notably, the rating reaffirmation rate continued to be stable at 80 per cent.

Subodh Rai, Managing Director, Crisil Ratings said, “Rating upgrades continued to surpass downgrades, reflecting resilient domestic growth, supported by the government’s continued policy support towards infrastructure build, revival of rural consumption demand and leaner corporate balance sheets. As many as 38 per cent  of the upgrades were from the infrastructure and linked sectors. The primary drivers include acquisitions by strong sponsors and lower than expected debt, particularly in the renewables sector, reduction in project risks as road projects achieve critical milestones, progressive order execution in construction and a healthy order book in the capital goods sector.”

On the other hand, the rating downgrades were spread across sectors. The downgrades seen in the agricultural products and textiles sectors were due to volatile realisations and moderation in global demand, respectively. Furthermore, entity-specific liquidity issues, particularly in companies rated in the sub-investment grade category, also contributed to the downgrades.

Gearing will remain healthy (below 0.5 times) despite private sector capital expenditure (capex) showing signs of revival from the sharp decline seen during the pandemic. The capex is to accommodate the improving capacity utilisation.

However, capex intensity — measured as capex over Ebitda1 — remains moderate, averaging about 50 per cent over fiscal 2024 and 2025 as against the decadal high of 72 per cent during fiscal 2016. This, together with lean corporate balance sheets, implies that India Inc. has significant financial headroom to support a broad-based capex as utilisation levels rise.