US-Iran war could hit Indian company profits by 200 bps
What's the story
A protracted conflict in West Asia could significantly impact the profitability of Indian companies, Crisil Ratings has warned. The agency predicts a potential decline of as much as 200 basis points in operating margins this fiscal year. This is mainly due to supply chain disruptions and rising costs. However, strong company balance sheets are expected to shield overall credit quality from major damage.
Business hurdles
Stress test on 34 sectors
Crisil Ratings conducted a stress test on 34 sectors, which make up nearly 65% of its rated corporate debt. The results show that companies are dealing with supply-chain disruptions, high fuel and freight costs, pricing pressures, and a depreciating rupee as the geopolitical crisis enters its third month. These factors have led to an assumption of crude oil prices averaging $110 per barrel this fiscal year under the stress scenario.
Financial strain
Managing costs and profitability a challenge
Subodh Rai, Managing Director at Crisil Ratings, said managing costs and profitability will be a bigger challenge than achieving topline growth. The agency found that 22 of the 34 sectors analyzed could see operating profitability decline by over 10%. This is due to higher inventory costs and limited ability to immediately pass on rising expenses to consumers.
Credit resilience
Corporate balance sheets to cushion impact
Despite the challenges, Crisil expects robust corporate balance sheets to cushion the impact on credit quality. Only eight sectors, accounting for around 10% of rated corporate debt, are likely to see material pressure on their credit profiles. The agency noted that India's median gearing has halved over the past decade and interest coverage has doubled, giving companies enough financial flexibility to absorb profitability shocks.
Sectoral impact
Airlines and ceramics sector to take biggest hit
The ceramics sector is likely to bear the brunt of this situation, with revenues possibly falling by over one-third and profitability halving due to gas shortages and supply disruptions. Airlines are also expected to come under severe pressure from airspace closures, higher aviation fuel prices, and rupee depreciation. Their profitability is estimated to decline by around 50%. Other sectors facing moderate impact include polyester textiles, specialty chemicals, and flexible packaging, among others.
Future forecast
Stable but cautious outlook on corporate credit quality
Crisil has maintained a "stable but cautious" outlook on overall corporate credit quality. However, it cautions that any prolonged escalation in the conflict could worsen inflationary pressures and disrupt demand further. Somasekhar Vemuri, Senior Director at Crisil Ratings, said while their outlook for India Inc's credit quality remains stable due to strong corporate balance sheets and steady domestic demand, they maintain a cautious stance because of the uncertain trajectory of the West Asia conflict.