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Profit margins of domestic companies are expected to experience a significant boost in the upcoming fiscal year, thanks to lower raw material costs and increased volume driven by local demand. This positive outlook has led an international rating agency, Fitch Ratings, to anticipate rating upgrades for these companies. However, Fitch Ratings also cautions that any sharp or sustained increase in energy prices could pose risks to this projection, particularly considering the ongoing geopolitical uncertainties.
In addition to the positive outlook for domestic companies, Fitch Ratings predicts that the country’s economy will continue to be one of the fastest-growing among large sovereigns. It anticipates resilient GDP growth of 6.5% in FY25, slightly lower than the expected 6.9% for the current fiscal year. The growth will be supported by robust demand for cement, electricity, petroleum products, and infrastructure development. Although there may be a moderation in car sales after strong growth in 2023, overall sales are expected to continue rising.
On the other hand, the report highlights that slowing demand in the US and the Eurozone may moderate sales for domestic IT services companies, resulting in revenue growth of 7-9% in FY25. However, these companies are likely to experience higher profitability and maintain solid ratings due to reduced employee attrition and wage pressures. IT service companies are also expected to generate healthy pre-dividend free cash flow margins of 10-18% due to stable operating profits and low working capital and capital expenditure requirements.
Fitch Ratings predicts that refining margins at oil companies will remain above mid-cycle levels in the near term, and lower crude prices in the next fiscal year will support marketing profits. The agency also believes that structural demand visibility, supply-side reforms, and improved corporate and bank balance sheets will lead to increased capital expenditure across most sectors.
Furthermore, Fitch Ratings expects robust credit growth in the banking sector in FY25, following double-digit growth in the previous fiscal year. The agency attributes this growth to banks’ increasing risk appetite, a positive economic outlook, and potential interest rate cuts in 2024. This favorable banking environment is expected to provide financial flexibility for corporations.
Since 2022, domestic corporates have shown a preference for rupee debt over overseas issuances due to unfavorable pricing dynamics resulting from global monetary tightening and higher emerging market risk premiums.
Overall, Fitch Ratings’ report presents an optimistic outlook for domestic companies and the economy as a whole, but it highlights the importance of monitoring energy prices and geopolitical risks to ensure sustained growth.,
Fitch Ratings highlights the importance of better profitability in supporting corporate rating headroom. Improved profitability allows companies to generate higher cash flows, reducing their dependence on external financing and improving their creditworthiness. It also provides them with the flexibility to invest in growth opportunities and withstand economic downturns. Fitch emphasizes that sustainable profitability is crucial for companies to maintain and enhance their credit ratings, ensuring access to favorable financing conditions and investor confidence.
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