Corporate sector may clock single digit profitability this fiscal: India Ratings

By: | Published: July 27, 2016 7:46 PM

Corporate sector will clock a single digit improvement in profitability in the current fiscal as leveraged borrowers are likely to show higher degree of deterioration in earnings, says a report.

Corporate sector will clock a single digit improvement in profitability in the current fiscal as leveraged borrowers are likely to show higher degree of deterioration in earnings, says a report.Corporate sector will clock a single digit improvement in profitability in the current fiscal as leveraged borrowers are likely to show higher degree of deterioration in earnings, says a report.

Corporate sector will clock a single digit improvement in profitability in the current fiscal as leveraged borrowers are likely to show higher degree of deterioration in earnings, says a report.

“Leveraged borrowers are likely to report a higher degree of deterioration in financial performance than non-leveraged borrowers in the next 18 months, restricting the overall improvement in profitability to single digits in the financial year 2016-17,” India Ratings and Research said.

In the last fiscal the profitability of the sector was 2 per cent while it was 8.6 per cent in the financial year ended March 2015.

The report said companies having strong cash flow generation ability and low debt levels are likely to benefit from a gradual revival in the economy as nominal gross domestic product (GDP) growth picks up during the course of the current financial year.

The current fiscal’s growth would be supported largely by consumption demand, especially urban consumption with improvement in rural consumption likely during the fourth quarter assuming normal monsoons.

As per the report, the private investment, exports and government expenditure are likely to remain marginal contributors in the growth this year.

It further said corporates having weak credit profiles, significant leverage and low pricing power are likely to lose market share and show further deterioration or limited improvements in cash flow generation.

“As demand picks up, borrowing conditions would continue to be difficult for these corporates due to their stretched balance sheets especially given their sole reliance on the domestic banks,” the report said.

For this financial year, the rating agency expects consumption-linked sectors to fare better than the investment-linked sectors as the latter would be affected by the issues of high leverage and continued low capacity utilisation amid improving-but-tepid demand conditions.

Also, revenue in some of the investment-linked sectors could pick up this year on the back of an improvement in demand and continuous spending by the government such as those in roads and railways through the engineering, procurement, and construction route.

However, benefits of input cost would fade away keeping a check on profitability, it said.

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