Icra forecasts a potential enhancement in India Inc’s credit metrics to a range of 4.5-5 times during the third quarter of the fiscal year 2023-24.

India Inc’s Q3 Credit Metrics Set for Sequential Improvement, Says Icra

Icra anticipates a modest sequential upturn in India Inc’s credit metrics during the third quarter of the ongoing fiscal year. The rating agency forecasts an enhancement in interest coverage to 4.5-5 times, attributing this improvement to the augmented earnings of corporate India. This boost stems from sustained, albeit moderated, tailwinds from commodity prices and robust demand witnessed during the recent festive season, as stated in Icra’s official release.

Operating Profit Margins on the Rise in Q2 FY2023-24

Icra’s examination of the Q2 FY2023-24 performance of 601 listed companies (excluding financial sector entities) reveals a positive trend in operating profit margins (OPM). The OPM increased by 398 basis points (bps) on a year-on-year basis and 64 bps sequentially. This improvement is primarily attributed to the softening of commodity prices. Despite recent decreases in input costs, India Inc’s OPM is yet to return to historical highs.

Revenue Growth and Realisation Levels in Focus

Corporate India witnessed a 1.6% year-on-year (YoY) and 0.1% sequential growth in revenue during Q2 FY2024. Steady demand supported this expansion; however, YoY revenue growth faced constraints due to a general decline in realisation levels amidst softening input costs for various sectors. Kinjal Shah, Vice President and Co-Group Head – Corporate Ratings at Icra Limited, emphasized these dynamics.

Interest Coverage Ratio Sees Improvement, but Sequentially Flat

Icra notes a year-on-year improvement in interest coverage ratio, reaching 4.5 times for Q2 FY2023-24, compared to 3.9 times in the corresponding period of the previous fiscal year. This positive shift is attributed to enhanced earnings and a recent pause in rate hikes by the Reserve Bank’s Monetary Policy Committee. However, the ratio remains unchanged on a sequential basis.

Outlook for Q3 FY24 and Long-Term Considerations

Expectations point towards a further improvement in India Inc’s interest coverage to 4.5-5.0 times in the third quarter of FY24, backed by anticipated earnings revival and a stable interest rate environment. Despite these positive developments, Icra acknowledges the need to monitor long-term inflationary trends.

FAQ: India Inc’s Q3 Credit Metrics and Economic Outlook

Q1: What factors contribute to the anticipated improvement in India Inc’s credit metrics in Q3?

A1: The expected improvement is attributed to enhanced earnings driven by sustained tailwinds from commodity prices and robust demand during the recent festive season.

Q2: What does Icra’s analysis reveal about operating profit margins in Q2 FY2023-24?

A2: Icra’s examination indicates a positive trend in operating profit margins, with a notable increase of 398 basis points (bps) year-on-year and 64 bps sequentially, primarily due to softening commodity prices.

Q3: How did corporate India perform in terms of revenue growth during Q2 FY2024?

A3: Corporate India experienced a 1.6% year-on-year (YoY) and 0.1% sequential growth in revenue during Q2 FY2024, supported by steady demand. However, YoY growth faced constraints due to a decline in realisation levels amid softening input costs.

Q4: What contributed to the improvement in interest coverage ratio for Q2 FY2023-24, according to Icra?

A4: Enhanced earnings and a recent pause in rate hikes by the Reserve Bank’s Monetary Policy Committee contributed to the year-on-year improvement in interest coverage ratio to 4.5 times in Q2 FY2023-24.

Q5: What is the outlook for India Inc’s interest coverage in the third quarter of FY24?

A5: Anticipated earnings revival and a stable interest rate environment are expected to lead to further improvement, targeting an interest coverage of 4.5-5.0 times in Q3 FY24, according to Icra.

Q6: What considerations does Icra highlight for the long term despite the positive trends?

A6: Icra emphasizes the importance of monitoring long-term inflationary trends as a factor influencing India Inc’s economic outlook.

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