Moody’s Ratings on Tuesday (August 20, 2024) said rated Indian companies will spend $45-50 billion annually over the next 1-2 years towards capex as companies boost capacity, with the country’s most valued firm Reliance Industries alone accounting for 30% of the spendings.

Investments to increase vertical integration and achieve net zero targets will also keep spending high, Moody’s Ratings said in a report on corporates in India and Indonesia.

“Rated Indian companies’ capex will remain elevated at around $45-50 billion annually over the next one to two years. With an annual capex budget of around $15 billion spread across its different business segments, Reliance Industries alone will account for around 30% of the portfolio capex,” Moody’s Ratings said.

The oil and gas sector and Reliance Industries will collectively account for over 60% of the rated Indian portfolio’s spending over the next couple of years.

Moody’s said the seven rated oil and gas companies in India will also account for around 30% of rated Indian companies’ capex.

These companies will spend around $15 billion annually to expand existing capacity and make green energy investments to reduce carbon transition risk.

For instance, Oil and Natural Gas Corporation Ltd. (Baa3 stable) and Indian Oil will spend $6 billion and $4 billion, respectively, in each of the next two years on reserves addition, downstream integration and energy transition, Moody’s added.

It also said strong earnings will continue to keep the leverage of Indian corporates low, even as companies push ahead with capital spending plans in response to consumption growth and as offshore borrowing rates remain high.

Moody’s said credit quality will remain robust for companies in India and Indonesia.

India and Indonesia are the two largest emerging market economies in Asia excluding China. These two G-20 countries have the highest number of rated companies and volume of rated debt among emerging economies in the region outside of China.

India’s GDP is projected to grow at over 6% over the next two years, Moody’s said, adding domestic demand will be the main driving force behind India’s growth.

The large proportion of domestic consumption in India has and will continue to insulate the rated companies from external shocks. In addition, as urbanisation accelerates across the country, sustained government spending on infrastructure will stimulate business activities across key industrial sectors, Moody’s said.

India’s economy is well diversified across services and manufacturing. India’s large domestic market helps to shelter the country from fluctuations in external demand, Moody’s said, adding it expects leverage for rated companies in India will remain low.

Moody’s Ratings expects earnings for the rated Indian companies will grow 5% over the next couple of years. Companies will benefit from the broad-based growth across various sectors, including metals, mining and steel, telecommunications and automobile companies.

Moody’s corporate headquarters in New York. File
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Moody’s Analytics on April 12 projected India’s economy to expand 6.1% in 2024, lower than 7.7% growth clocked in 2023.

It said output in India remains 4% lower than it would have been without the COVID pandemic and its various aftershocks — from supply snags to military conflicts abroad.

“Economies in South and Southeast Asia will see some of the strongest output gains this year, but their performance is flattered by a delayed post-pandemic rebound. We expect India’s GDP to grow 6.1% in 2024 after 7.7% last year,” Moody’s Analytics said.

In its report titled ‘APAC Outlook: Listening Through the Noise’, Moody’s Analytics said the region overall is doing better than other parts of the world. “The APAC (Asia Pacific) economy will grow 3.8% this year, which compares with a growth of 2.5% for the world economy,” it said.

Moody’s Analytics said looking at the GDP relative to its trajectory prior to the pandemic shows that India and Southeast Asia have seen some of the largest output losses worldwide and are only beginning to recover. With regard to inflation, it said the outlook for China and India is more uncertain.

“Inflation in India is at the opposite extreme, with recent consumer price inflation rates hovering around 5%, close to the upper end of the Reserve Bank of India’s target range of 2 to 6% and without clear evidence of a trend towards slowing price pressures,” said the report authored by Stefan Angrick, Senior Economist, and Jeemin Bang, Associate Economist at Moody’s Analytics.

Earlier this month, the Reserve Bank said food price uncertainties continue to weigh on the inflation trajectory going forward, and retained 4.5% retail inflation projection for the current fiscal 2024-25.

“Continuing geopolitical tensions also pose upside risk to commodity prices and supply chains,” RBI said. RBI forecast June quarter inflation at 4.9% and September quarter at 3.8%. For December and March quarters, inflation is projected at 4.6% and 4.7%, respectively.

Petrol and diesel prices are unlikely to be increased despite firming raw material costs because of upcoming general elections next year, Moody’s Investors Service said.

Three state-owned fuel retailers — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) — which control roughly 90% of the market, have kept petrol and diesel prices on freeze for a record 18 months in a row.

This is despite the raw material (crude oil) cost surging last year, leading to heavy losses in first half of 2022-23 fiscal year before easing oil prices propelled them to profitability.

Also Read | High oil prices to weaken profitability of 3 PSU oils firms, says Moody’s

International oil prices have firmed up since August, leading to margins of three retailers turning negative again.

“High crude oil prices will weaken the profitability of the three state-owned oil marketing companies in India — IOC, BPCL and HPCL,” Moody’s said in a report.

“The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024.”

The OMCs’ marketing margins — the difference between their net realized prices and international prices — have already weakened significantly from the high levels seen in the quarter ended June 30, 2023 (1Q fiscal 2024). Marketing margins on diesel turned negative since August while margins on petrol have narrowed considerably over the same period as international prices increased.

“The increase in raw material costs comes after the price of crude oil jumped around 17% to more than $90 per barrel in September, from an average of $78 a barrel in 1Q fiscal 2024,” Moody’s said. “An extension in production cuts by the Organization of the Petroleum Exporting Countries (OPEC) of around 1 million barrels a day until December 2023, combined with Russia’s extended export cuts of around 300,000 barrels a day over the same period have driven oil prices higher.”

Nonetheless, high oil prices are unlikely to be sustained for long as global growth weakens, it said.

“The decline in the OMCs’ marketing margins has been mitigated to some extent by the increase in gross refining margins (GRMs). The benchmark Singapore GRMs have improved since June in part due to continued growth in liquid fuels consumption in the region as well as planned refinery outages which constrained the supply of petroleum products in the region,” it said.

The ratings agency expected GRMs and international prices of transportation fuels to moderate in subsequent quarters as concerns over China’s economic slowdown dampen demand while supply increases as refineries come back online after the completion of scheduled maintenance activities.

“Although a smaller gap between international and domestic prices will reduce marketing losses for the OMCs, their overall profitability will remain weak as retail selling prices will likely remain unchanged,” it added.

After very strong earnings in April-June quarter, OMCs’ operating performance is expected to weaken over the next 12 months as oil prices remain at current elevated levels.

“Still, the three companies’ fiscal 2024 (April 2023 to March 2024) earnings will remain strong and higher than historical levels, even if crude oil prices remain at current levels of $85 per barrel to $90 a barrel in the second half of fiscal 2024.

“This is attributable to the OMCs’ exceptionally strong earnings in 1Q fiscal 2024. The three companies’ EBITDA in the first quarter alone was close to their average annual EBITDA for the last few years,” Moody’s said, adding the OMCs will start incurring EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around $100.

Strong marketing margins for petrol and diesel drove the robust operating performance in 1Q fiscal 2024.

OMCs’ net realised prices on sale of diesel and petrol have largely remained unchanged since April 2022 even though feedstock costs had declined steadily. The price of Brent crude declined to $78 per barrel (bbl) in 1Q fiscal 2024 from $112 in 1Q fiscal 2023.

Among the three OMCs, IOCL and BPCL are better positioned to withstand any further increase in crude oil prices, compared to HPCL, the rating agency said, adding the difference in the OMCs’ capacity to absorb an increase in feedstock costs stems from the difference in their business profiles.

IOCL’s and BPCL’s larger-scale operations and a high degree of integration between their refining and marketing segments allow them to weather the impact of adverse changes in the operating environment. IOCL’s presence in petrochemicals and pipelines also reflects its business diversification. Meanwhile, HPCL’s smaller scale and a higher dependence on its marketing operations make it more vulnerable to any unfavourable price movements.

“Strong earnings in 1Q fiscal 2024 and lower crude oil prices compared with fiscal 2023 have reduced the OMCs’ working capital requirements and allowed them to reduce their borrowings over the past few months. As a result, we expect leverage, as measured by debt/EBITDA, for all the three companies to remain well positioned compared with the rating thresholds through fiscal 2024. This is despite capital spending and shareholder payments remaining high and rising crude oil prices resulting in increased working capital requirements in the period,” it said.

Meanwhile, the Indian government’s ₹30,000 crore in capital support for the oil marketing sector announced in the budget earlier this year will boost cash flows for the OMCs and partially cover their capital spending needs. To this effect, IOCL and BPCL have already announced rights issues to the government.

Moody’s said it has however not factored this into its projections as the timing and quantum of such proceeds remain uncertain at this time.

New Delhi:

Moody’s Investors Service on Friday affirmed India’s rating at the lowest investment grade of ‘Baa3’, with a stable outlook, saying high growth will support a gradual increase in income levels, but flagged risks of populist policies due to rise in political tensions.

Moody’s said although India’s potential growth has come down in the past 7-10 years, the growth would outpace all other G20 economies through at least the next two years, driven by domestic demand.

Moody’s said the restoration of robust growth prospects post-pandemic, the effective commitment to inflation targeting and the rehabilitation of the financial system aided by reform supports its view of strengthening monetary and macro policy effectiveness.

“However, the curtailment of civil society and political dissent, compounded by rising sectarian tensions, support a weaker assessment of political risk and the quality of institutions,” Moody’s said while affirming the government’s long-term local and foreign-currency issuer ratings and the local-currency senior unsecured rating at Baa3.

The US-based rating agency said the violence in Manipur has led to at least 150 deaths since May 2023.

“Although elevated political polarization is unlikely to lead to a material destabilization of government, rising domestic political tensions suggest an ongoing risk of populist policies–including at the regional and local government levels–amid the prevalence of social risks such as poverty and income inequality, as well as inequitable access to education and basic services.”

“Moreover, the periodic flaring of border tensions with neighbouring countries was an outlier among sovereigns assessed as having a lower overall susceptibility to political risk,” Moody’s said.

Baa3 is the lowest investment grade rating.

All three global rating agencies, Fitch, S&P and Moody’s, have the lowest investment grade rating on India, with a stable outlook. The ratings are looked at by investors as a barometer of a country’s creditworthiness and affect borrowing costs.

Moody’s said in the absence of more material gains in revenue, the central government will be challenged to achieve its fiscal deficit target of 4.5 per cent of GDP for the fiscal year beginning April 2025 (fiscal 2025) from 6.4 per cent in fiscal 2022.

Consequently, Moody’s projects general government debt to stabilize at around 80 per cent of GDP over the next 2-3 years, lower than the peak of almost 90 per cent reached in fiscal 2020 but higher than many similarly-rated sovereigns.

The stable outlook reflects Moody’s expectations of broad financial and external stability as represented by resilient credit growth, ample domestic liquidity to meet the funding requirements of the public and private sector, manageable current account deficits and sufficiently large foreign-currency reserves to meet the country’s external payment obligations and import needs.