According to Fitch Rating, the continued inflation and slower economic growth in the world are rising, and they expose 12 Indian corporations, including eight public sector entities (all in Energy and utilities) and four private-sector firms, to elevated downgrade risks, Business Standard reported.
The four non-government linked issuers on negative outlook are Bharti Airtel, Summit Digitel Infrastructure, Adani Transmission, and UltraTech Cement. They are not constrained directly by India’s rating but would be downgraded if India's country ceiling is lowered to 'BB+'.
India's sovereign rating shall play a prominent role in determining whether such risk crystallises for 12 of these India-based companies.
The risks of stagflation prolonged inflation and slower growth are increasing, with increased supply-chain risk from sanctions against Russia, pandemic-related lockdowns in China, and tighter labour market conditions.
The severity of labour shortages varies across Asia Pacific economies, with, for example, Australia being more exposed to wage inflation than China and Indonesia.
The Indian utilities and oil & gas sectors, along with Chinese homebuilding, stand out with a high proportion of corporates assessed with a ‘low’ rating headroom.
Fitch said 'low' headroom conveys that leverage is already near or higher than the negative sensitivity, or other important parameters, such as profitability and free-cash-flow generation were weak for the rating level. This is typically the case for those already on a negative outlook or rating watch negative.
Under the stagflation scenario, the rating agency assumes the surge in global oil prices lasts over a longer period with average annual prices of $150/bbl in 2022 and $130/bbl in 2023. Its current baseline assumptions are 100/bbl and $80/bbl (for Brent), respectively. This compares with the average of $71/bbl in 2021.
In addition, headline inflation is elevated. Other commodities, like wheat and aluminium, are maintaining historically high prices as a result of the Russia-Ukraine conflict.
High global oil prices reduce household income and consumer spending, especially for lower-income households who spend a bigger portion of their income on food and energy bills, according to the rating agency.
Meanwhile, a recent Reuters poll noted that India's equity markets will mark their first annual decline in seven years in 2022 as higher interest rates and weakening growth prospects reduce the chances of a quick rebound from this year's already sharp drop.
The Reuters poll of 30 equity strategists, which was conducted May 13–24, forecast the BSE Sensex to recoup less than half of its recent losses and gain only 3.2% to 56,000 by the end of 2022 from Monday's close of 54,288.61.
More than 70% of respondents, 19 out of 27, who answered an additional question, said volatility in the domestic stock market would increase over the coming three months.
Seven said it would increase significantly, while 12 forecasts a mild increase. The remaining eight said there would be a decrease.
India's benchmark BSE Sensex has fallen nearly 7% so far this year and around 12% since this year's high of 61,475.15 on January 18, a level the index was not expected to reclaim anytime soon. If realised, the annual decline of about 4% would be its first yearly loss since 2015, the report said.