India Inc is expected to post a sequential revenue growth in Q3FY25, led by improved rural demand and uptick in Government spending, additionally supported by the festive season, stated a report by ICRA. However, it added, headwinds such as uneven urban demand and evolving global uncertainties could weigh on growth in H2FY25. On balance, ICRA forecasted the operating profit margin (OPM) for India Inc to improve in the coming quarters. As a result, the credit metrics of India Inc in Q3FY25 are estimated to improve with the interest coverage ratio in the range of 4.5-5.0 times, against 4.1 times in Q2FY25.
Kinjal Shah, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA Limited, said, “While corporate India witnessed a muted sequential revenue growth in Q2FY25, led by ongoing slowdown in urban demand, lower Government spending amid monsoon-related disruptions, the same is expected to improve in the coming quarters. This would be supported by continued growth in consumption oriented sectors like FMCG, Retail as well as improved revenues in commodity oriented sectors like iron and steel and cement, among others, led by uptick in Government capex spending as well as increased rural demand. Nonetheless, ongoing geopolitical tensions and the possibility of higher tariffs remain an overhang on demand sentiments, especially for export-oriented sectors such as textiles and cut and polished diamonds.”
ICRA analysed the performance of 590 listed companies (excluding financial sector entities) during the fiscal second quarter to reveal a 6 per cent YoY revenue growth for corporate India and a moderation in OPM, by 102 bps to 16.9 per cent. Despite the YoY growth in revenues, ICRA said, higher input cost with weak urban demand, adversely impacted the margins. On a sequential basis, the OPM declined by around 81 bps in Q2FY25. While the input costs have softened in recent months, they remained higher compared to the historic levels, and accordingly, India Inc’s OPM is yet to revive to its historic highs (19 per cent seen in FY2022).
The interest coverage ratio of ICRA’s sample set companies, adjusted for sectors with relatively low debt levels (IT, FMCG and pharma), declined on a YoY basis to 4.1 times in Q2FY25 from 4.5 times in Q2FY24 due to a decline in operating profits and higher interest outgo. India Inc reported a marginal 4 per cent YoY increase in debt levels as on September 30, 2024. Despite the variations in debt levels across sectors, India Inc reported largely stable credit metrics over the recent past, the report stated. The improvement in earnings on the back of recovery in demand across some sectors arrested the sharp increase in total debt/OPBITDA levels of India Inc during H1FY24.
“With the Monetary Policy Committee (MPC) having taken a pause on rate hikes since its April 2023 meeting and with expectations of improvement in OPM, India Inc’s interest coverage is expected to increase in the near term”, Kinjal Shah added.
That said, evolution of the global economic scenario, pick up in government spending and a revival in urban demand would remain the key monitorables over the near term, ICRA concluded.