Rating agency India Ratings and Research (Ind-Ra) has revised its outlook to neutral for the mid-corporate (MEC) sector for the remainder of FY23 from improving.
“All the key sectors are performing in line with the agency’s expectations. Key sectors such as steel and textiles, which have endured phenomenal growth in the top line and profitability in the past 15-18 months, are likely to see some profitability dip as input costs rise,” said Ind-Ra.
In a recent report, Ind-Ra has provided a snapshot of the sector-wise performance of MECs, focusing on the key sectors where these entities are largely concentrated. Ind-Ra has also maintained a stable rating outlook for its MEC-rated portfolio for FY23.
Textiles: Profitability in terms of EBITDA margins have remained stable at 7.90% in the first half of the current financial year (H1FY23) (FY22: 7.70%), said Ind-Ra.
The marginally better margins were on account of a rise in the raw material prices and thereby the industry fetching inventory gains.
Ind-Ra said the interest coverage has also been consistent in Q1FY23, backed by an improvement in the absolute EBITDA.
“With the increase in cotton prices, the EBITDA margins however are expected to decline. The agency expects ongoing capex to affect credit metrics in FY23,” said Ind-Ra.
Steel: Ind-Ra pointed out that the EBITDA margin has been subdued at 5.5% in Q1FY23 (FY22: 6.8%), due to a correction in steel prices post the export duty levy and higher coking coal costs.
The interest coverage sustained in Q1FY23, compared to H2FY22, and is on an improving trend due to an increase in absolute EBITDA and deleveraging.
“The sector might also focus on debt-led capex to support the growing demand. The latter coupled with stressed margins can put pressure on the sector's credit profile,” said Ind-Ra.
Auto ancillary: The margins declined by 106bp in Q1FY23 as a result of increased input costs. Moreover, companies are selling large quantities to established MNCs, leading to customer concentration and price escalation to cover the increased input costs, said Ind-Ra.
With the improvement in the absolute EBITDA, the interest coverage improved in Q1FY23. Ind-Ra expects the sector to perform better in H2FY23 on the back of pent-up demand from the festive season.
Also, Ind-Ra said the impact of chip shortage is getting partly mitigated as additional capacities of chip manufacturers are available for production, coupled with better supply chain management. However, auto ancillaries with significant exposure to exports (especially to Europe and some emerging markets) could experience the challenges of lower demand.
Pharmaceuticals: EBITDA margins improved marginally in Q1FY23, led by cost optimisation. Ind-Ra expects EBITDA margins to get affected by the unprecedented price erosion witnessed in the US market for generic medicines as a result of intense competition, said the rating agency.
The interest coverage also improved marginally in Q1FY23 due to an expansion in the absolute EBITDA and debt repayment. There might be a marginal increase in capex due to incremental capacity addition funded through debt, which could affect the credit metrics, said Ind-Ra.
Hotels: The profitability seems to be back on track with the EBITDA margins growing in the annualised Q1FY23, which was also marginally higher than the average margins being booked during the pre covid period, said Ind-Ra.
Ind-Ra expects the industry to further grow at similar levels as travel restrictions have eased out with appropriate vaccination drives and the resultant reduction of the covid impact.
The Q1FY23 result is also in line with Ind-Ra’s prediction of the ease in travel restrictions. Also, the liquidity support extended in the budget, in the form of guaranteed emergency credit lines of ₹50 billion, can be seen to have materialised, Ind-Ra said.
Another ₹500 billion in the form of an emergency credit line guarantee scheme has been extended which is also expected to provide further comfort, said the rating agency.
Consumer foods: The profitability in annualised Q1FY23 has sustained at levels seen during FY22. However, the industry is yet to get back to the pre covid levels, Ind-Ra said.
The interest coverage improved in Q1FY23 because of the lesser utilisation of the short-term limits backed by no major working capital build-up. However, the risk of input cost-related inflation continues and the resultant inability to pass it to distributors. Ind-Ra expects the industry to perform in a similar manner in FY23, said the rating agency.
Engineering procurement & construction: The EBITDA margin remained stable in Q1FY23 as the majority of contracts bid by mid-sized entities in FY22 either factor in elevated prices or carry variable prices, Ind-Ra said.
However, if volatility in raw material prices continues, small-scale players could face margin pressure. Overall, Ind-Ra expects the margins to remain stable in FY23 while the order book could grow on the back of improved government spending.
Engineering: The EBITDA margins declined marginally in Q1FY23, due to increasing input costs. The margins might improve due to a diminution in the cost of steel which is a major raw material for the sector, Ind-Ra said.
The interest coverage normalised to pre-covid level in Q1FY23, assuming that the working capital credit facilities have been optimally utilised to support its operations. The sector might look to incur capex to match the growing demand which might put some pressure on the credit metrics, the rating agency pointed out.
Disclaimer: The views and recommendations given in this article are those of the rating agency. These do not represent the views of MintGenie.
