India Inc's large capex will need offshore funding: Moody's

Capacity expansion, inorganic growth, refinancing and working capital needs, along with shareholder payments, will keep capital requirements high for corporates in India, according to Moody’s Ratings.

“While India’s domestic liquidity and companies’ internal cash flow can largely cover their capital needs, offshore funding will remain key despite its share reducing to 12% of India Inc’s total funding due to its higher costs and rising domestic liquidity,” says Vikash Halan, managing director, Moody’s.

Moody’s believes non-financial corporates will face stiff competition from the retail sector for bank funding as retail loans face high demand and have higher yields relative to corporate loans. At the same time, India’s growing domestic bond and equity markets still comprise a small share of companies’ funding, at only 12% over the past decade on average.

Indian corporates have capacity to incur additional debt to meet funding needs, says Moody’s. Over the past decade, the corporate sector has steadily cut debt to 55% of GDP from 72% while leverage has remained stable.

Meanwhile, ICRA, a Moody’s affiliate in India, notes that the Indian corporate sector saw steady business momentum in the fiscal year ended March 31, 2024, supported by both consumption and investment activity. Still, rural areas have so far faced sub-par monsoons and inflationary trends that have dampened consumption. However, urban-focused businesses such as residential real estate, hospitality, airlines, jewellery and automobiles have continued their robust momentum.

“Despite the likely higher debt, India Inc. will continue to report stable credit metrics due to stabilising inflationary pressures and a steady interest rate regime. The forecast of a normal monsoon season should support a nascent recovery in rural markets,” says K. Ravichandran, ICRA’s chief ratings officer.

ICRA expects the pace of private sector capex to be moderate in the first half of FY25 due to the likely pause in infrastructure activities before the general elections. Over the near to medium term, however, private capex will ride on a general uptick in macroeconomic activity, as well as several supportive policy measures such as the Production Linked Incentive schemes.

ICRA expects select sectors to face a stronger uplift in capex such as metals, specialty chemicals and automotive due to expansion plans and strong demand. Likewise, the regulatory push for a greener environment will spur investment in related infrastructure. Still, global macro-economic risks pose challenges, especially for export-oriented sectors such as bulk chemicals, cut and polished diamonds, as well as textiles.

On the Indian banking sector, Moody’s expects loan growth of 12%-14% over the next 12-15 months as loans grow in line with deposits. Systemwide net interest margins will soften selectively as banks reprice maturing deposits at higher rates to reflect previous increases in interest rates, the rating agency says.