Amid global crisis, Moody's rates TCS, Infosys, RIL above the sovereign

Moody's Investors Service has rated Tata Consultancy Services (TCS), Infosys and Reliance Industries above the sovereign due to their strong financials and significant global earnings.
Moody's said the stable outlooks on Genpact and UPL Corporation, in contrast to the negative outlook on India's Baa3, rating reflect that they can maintain their current ratings if the sovereign was downgraded to Ba1.

Two other companies' ratings are capped at the same level as the sovereign rating. Oil and Natural Gas Corporation's and Petronet LNG's credit quality is also stronger than the sovereign's. But their ratings are capped at Baa3 because of their strong links with the government or other government-owned entities.
Investment-grade IT companies' global operations and minimal reliance on domestic funding allow them to be rated up to two notches above the sovereign. TCS and Infosys are rated two notches above the sovereign.
Their credit profiles and geographical diversification are substantially stronger than Genpact's. Still, Genpact will likely maintain its current rating should the sovereign get downgraded to Ba1.
Large scale, diversified business and balanced funding mix allow Reliance to be rated one notch above the sovereign. Still, Reliance's digital services and retail businesses have increased its links to India's economy. Thus it does not meet the criteria to be rated two notches above the sovereign even if its credit metrics warrant such an assessment.
UPL's globally diversified customer and manufacturing base, and limited reliance on domestic funding sources allow it to be rated one notch above the sovereign. The company's stable outlook despite the sovereign's negative outlook reflects that UPL will maintain its current ratings even if the sovereign is downgraded to Ba1, all other things remaining the same.
Moody's said ratings of 9 of the 11 investment-grade companies will likely be downgraded by one notch if the sovereign rating falls to Ba1. Only UPL and Genpact are likely to maintain their current Baa3 ratings.
TCS, Infosys and Reliance will continue to retain their investment-grade status even at lower ratings. But the six government-owned or government-linked companies will lose their investment-grade ratings.

Covid-19: Moody's changes outlook on Indian banks from stable to negative

Moody's Investors Service on Thursday changed the outlook for the Indian banking system to negative from stable, as it expects a deterioration in banks' asset quality due to disruption in economic activity from the coronavirus outbreak. It said Banks' asset quality will deteriorate across the corporate, small and medium enterprises and retail segments, leading to pressure on profitability and capital.
"We have changed the outlook for the Indian banking system to negative from stable. Disruptions to economic activity from the coronavirus outbreak will exacerbate a slowdown in India's economic growth," Moody's said.

Stating that asset quality will deteriorate, Moody's said a sharp decline in economic activity and a rise in unemployment will lead to a deterioration of household and corporate finances, which in turn will result in increases in delinquencies.
"Growing solvency stress among non-bank financial institutions will increase risks to banks' asset quality because banks have large exposures to the sector," it added. It expects deteriorating profitability and loan growth to hurt capitalisation.
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"Increases in loan loss charges and declines in revenue will hurt banks' profitability, which will lead to a deterioration of capitalization. If the government makes more capital infusions into PSBs, as it has in the past few years, it will mitigate capital pressure for them," it added.
It said while funding and liquidity at public sector banks (PSBs) will be stable, growing risk aversion in the system following a default by a private sector bank (Yes Bank) will increase funding and liquidity pressure on small private sector lenders.
"Disruptions from the coronavirus outbreak will exacerbate India's economic slowdown. A deterioration of global economic conditions and a 21-day lockdown imposed by the Indian government in an effort to slow the spread of coronavirus will weigh on domestic demand and private investment," Moody's added.
Moody's rates 16 commercial banks in India, which together account for around 75 per cent of deposits in the system.

Moody's cuts India's FY20 growth projection to 4.9% citing weak consumption

Moody'sInvestors Service on Monday said that India's weak household consumption will curb economic growth and weigh on the credit quality of Indian issuers in a range of sectors.
Moody's has lowered its GDP growth projection for India for the fiscal year ending March 2020 to 4.9 per cent from 5.8 per cent.

The major factors responsible for weakening economic growth were rural financial stress, low job creation and liquidity constraints, said Moody's in a report.
"What was once an investment-led slowdown has now broadened into weakening consumption, driven by financial stress among rural households on the back of stagnating agricultural wage growth and constrained productivity, as well as weak job creation due to rigid land and labour laws," said Deborah Tan, a Moody's assistant vice president and analyst.
Household consumption has been the backbone of India's growth, making up about 57 per cent of GDP in FY2018-19. Like other major markets, India's growth has decelerated, with GDP growth falling to 4.5 per cent in Q3 2019 from 5.0 per cent in Q2 2019.
The report further noted that the credit crunch among non-bank financial institutions (NBFIs), the major providers of retail loans in recent years, has "exacerbated" this slowdown.
"While the income shock to households has been unfolding over several years, it was not visible on headline growth as long as households could borrow from NBFIs. With the materialization of a credit supply shock, we now see the impact of these twin shocks on growth," Tan added.
Moody's expects that government measures to stimulate domestic demand – including income support for farmers and low-income households, monetary policy easing and a broad corporate tax cut – will be limited in offsetting this slowdown.
"Although a modest recovery is expected for next year, supported partly by spillovers from policy stimulus, economic growth will be weaker than in recent years, which will have negative credit implications for Indian issuers in a range of sectors," it noted.
In automotive, weak demand and tight liquidity will constrain automakers' earnings. Moreover, slower economic growth over the last few quarters will also reduce debt servicing capabilities of households, which in turn will weaken the asset quality of retail loans across all segments.
Private-sector banks have a larger exposure to retail loans and may be more at risk, the report said adding that an increase in non-performing loans (NPLs) would be gradual.

Moody's slashes India's GDP growth forecast for fiscal 2020 to 5.8%

Moody's Investors Service on Thursday slashed its 2019-20 GDP growth forecast for India to 5.8 per cent from 6.2 per cent earlier, saying the economy was experiencing a pronounced slowdown which is partly related to long-lasting factors.
The projection is lower than 6.1 per cent that the Reserve Bank of India (RBI) had forecast just last week.

Moody's attributed the deceleration to an investment-led slowdown that has broadened into consumption, driven by financial stress among rural households and weak job creation.
"The drivers of the deceleration are multiple, mainly domestic and in part long-lasting," Moody's said in a report.
It expected the growth to pick up to 6.6 per cent in 2020-21 and to around 7 per cent over the medium term.
"Although we expect a moderate pick-up in real GDP growth and inflation in the next two years, we have revised down our projections for both. Compared with two years ago, the probability of sustained real GDP growth at or above 8 per cent has significantly diminished," it said.
Last month, the Asian Development Bank and the Organisation of Economic Cooperation and Development lowered 2019-20 growth forecast for India by 50 basis points and 1.3 percentage points to 6.5 per cent and 5.9 per cent, respectively.
Last week, the RBI also slashed its growth projection for the economy to 6.1 per cent from an earlier estimate of 6.9 per cent.
Rating agency Standard & Poor's has also lowered its India growth forecast to 6.3 per cent from 7.1 per cent.
In June, Fitch cut India's growth forecast for the current fiscal for a second time in a row to 6.6 per cent. It had earlier in March lowered the growth estimate for 2019-20 to 6.8 per cent, from 7 per cent projected earlier, on weak momentum of the economy.
Moody's said the drivers of the deceleration are multiple, mainly domestic and in part long-lasting.
"What was an investment-led slowdown has broadened into consumption, driven by financial stress among rural households and weak job creation," it said adding a credit crunch among non-bank financial institutions (NBFIs), major providers of retail loans in recent years, has compounded the problem.
"While we expect a moderate pick-up in real GDP growth and inflation over the next two years supported by monetary and fiscal stimulus, we have revised down our projections for both. We forecast real GDP growth to decline to 5.8 per cent in the current fiscal from 6.8 per cent in 2018-19, and to pick up to 6.6 per cent in 2020-21 and around 7 per cent over the medium term."
Moody's expected a 0.4 percentage point slippage in the fiscal deficit target of the government to 3.7 per cent of the GDP in the current fiscal due to the corporate tax cut and lower nominal GDP growth.
"A prolonged period of slower nominal GDP growth not only constrains the scope for fiscal consolidation but also keeps the government debt burden higher for longer compared with our previous expectations," it said.
It, however, saw "low probability" of a significant and rapid deterioration in fiscal strength, India's main credit constraint, given the resilience to financing shocks offered by the composition of government debt.
India's real GDP growth has declined in each of the past five quarters, falling to 5 per cent year-on-year in April-June 2019 from 8.1 per cent in January-March 2018.
"By international standards, 5 per cent real GDP growth remains relatively high, but it marks a low rate for India. Combined with a marked decrease in inflation in recent years, this has resulted in a material decline in nominal GDP growth from typical annual rates of 11 per cent or higher over the past decade, to around 8 per cent in the second quarter of 2019," it said.
While private investment has been relatively weak since 2012, consumption -- which makes up about 55 per cent of GDP -- had remained robust.
"However, private consumption growth has now also fallen quite sharply, to 3.1 per cent in the second quarter from 7.3 per cent in the first. This was the lowest rate of quarterly consumption growth since October-December 2014, and high-frequency consumption demand indicators (such as automobile, truck, two-wheeler and tractor sales) point to continued weakness," it said.
The government has estimated that the corporate tax cut will reduce revenue by around Rs 1.45 lakh crore or about 0.7 per cent of GDP in 2019-20.
"After factoring in exclusions for tax exemptions and the recent 0.3 per cent of GDP transfer of capital from the RBI, we expect a central government fiscal deficit of about 3.7 per cent of GDP in 2019-20, resulting in a slippage of 0.4 percentage points of GDP from the government's target of 3.3 per cent," Moody's said.
As a result, the general government deficit, which at about 6.4 per cent in fiscal 2018 is already much larger than those of Baa-rated peers (median of 2.5 per cent), is likely to remain wider than Moody's previously expected, it added.

Moody's says Reliance's 20% stake sale to Saudi Aramco credit positive

Moody's Investors Service on Wednesday said Reliance Industries' announcement of sale of a 20 per cent stake in its oil to chemicals (O2C) business to Saudi Arabian Oil Company (Aramco) will reduce the company's net leverage and is credit positive.
"The O2C business, which has an enterprise valuation of $75 billion, includes RIL's refining and petrochemical divisions, and RIL's 51 per cent stake in its fuel marketing business," Moody's said in a report.

The company also announced that it has entered into a deal with BP to sell 49 per cent stake in its fuel marketing business in India for $1 billion.
"Together, proceeds from these transactions will result in a $16 billion reduction in RIL's net debt, which will reduce RIL's adjusted net debt/EBITDA by 1.2x from 3.2x for fiscal year 2019, which ended in March 2019, a credit positive," it said.
The Aramco transaction structure is yet to be finalised and also remains subject to regulatory and other approvals.
RIL expects that the transaction will close before March 2020.
It will receive the proceeds in three stages - 50 per cent on closing, another 25 per cent after one year of closing and the balance 25 per cent in the following year.
The O2C business will be carved out into a division where Aramco will have an economic interest. It will have its own management and accounts.
"However, currently there are no firm plans to create a separate legal entity for this division (except for the fuel marketing business, which will be in a separate entity)," it said.
"The stake sales are in line with the company's target to reduce its net debt to zero by March 2021 and reflect the company's commitment to maintaining a strong financial profile despite significant capital spending over the last five years," it added.

Difficult for govt to maintain 3.4% fiscal deficit in FY20: Moody's

The government will find it difficult to meet the fiscal deficit target of 3.4 per cent in 2019-20 on account of higher spending and low revenue growth, Moody's Investors Service said.
Observing that Indian government's debt is "stubbornly high" as a percentage of GDP, Moody's Investors Service Managing Director, Sovereign Risk Group, Gene Fang said it could be brought down only if the Centre sticks to the fiscal consolidation path.
Deviating from the path laid down in the Fiscal Responsibility and Budget Management (FRBM) Act, the government has pegged the fiscal deficit for the next financial year at 3.4 per cent of GDP, as against the original target of 3.1 per cent.
"While the government's growth assumptions appear reasonable, we think the government will continue to face challenges in meeting its fiscal targets, primarily due to structural increases in spending and difficulties in raising revenue further," Fang told PTI in an interview.
Fang said the 3.4 per cent fiscal deficit target for the year ending March 2020 is wider than expected, largely driven by increased spending to provide income support to small farmers and tax rebates ahead of the general elections in April-May this year.
The Interim Budget for 2019-20 doled out a scheme under which farmers holding up to 2 hectares of land would get an annual payout of Rs 6,000 -- a move intended to benefit about 12 crore farmers, among other measures for middle-class taxpayers.
However, there was a 0.1 per cent slip in the fiscal deficit estimate for the current financial year to 3.4 per cent.
While presenting the Budget, Finance Minister Piyush Goyal had said the government has provided Rs 20,000 crore in 2018-19 and Rs 75,000 crore in 2019-20 for providing income support to farmers, which has led to the slippage in the fiscal deficit.
Asked if India risks a rating downgrade following the breach in fiscal deficit target, Moody's said the country's 'Baa2' rating has a 'Stable' outlook, which indicates a balance of upside and downside risks.
"India's government debt remains stubbornly high as a percent of GDP, but it's mostly domestically funded with a relatively long dated maturity structure. India's economic growth also offers the potential to bring debt/GDP down, but only if the medium term fiscal objectives of the FRBM are realised," Fang said.
As per the FRBM Act, debt-to-GDP ratio was to be brought down to 40 per cent by 2024-25 from 50.1 per cent in 2017-18.
In the 2018-19 Budget, the government had targeted to reduce its debt-to-GDP ratio to 48.8 per cent in 2018-19, 46.7 per cent in 2019-20 and 44.6 per cent in 2020-21, while fiscal deficit as a percentage of GDP was targeted to be reduced to 3.3 per cent, 3.1 per cent and 3 per cent, respectively during the same period.
US-based ratings agency Moody's had in 2017 upped India's rating to Baa2 from Baa3, changing outlook to 'stable' from 'positive', and said that reforms will help stabilise rising levels of debt.

Moody's places Airtel on review for a possible rating downgrade

Hong Kong-based Moody's Investors Service (Moody's) has placed on review for possible downgrade of the Baa3 issuer and senior unsecured rating of Bharti Airtel (Bharti) and the ratings on the backed senior unsecured notes issued by Bharti's wholly owned subsidiary, Bharti Airtel International (Netherlands) BV.
The review reflects the company's low levels of profitability, particularly from its core Indian mobile operations, negative free cash flow and higher debt levels to fund capital spending.

"The review for downgrade is primarily driven by our expectation that Bharti's cash flow generation will remain weak and leverage elevated," says Annalisa DiChiara, a Moody's Vice President and Senior Credit Officer.
In the September quarter, Bharti Airtel posted consolidated net income of Rs 1.18 billion up from Rs 0.97 billion in the previous quarter but 65 per cent down from Rs 3.4 billion a year ago. Consolidated revenues for the September quarter was Rs 204 billion, a decline of 6.2 per cent year-on-year but up just 1.7 per cent sequentially. Net debt increased to Rs 1.13 trillion from Rs 1.03 trillion in the last quarter. At 30 September 2018, Bharti's consolidated adjusted debt-to-EBITDA was around 4.5x. EBITDA is earnings before interest, tax, depreciation and amortisation.
India revenues for Q2'FY19 at Rs 149 billion declined 10.9 per cent on a reported basis from Rs 167 billion a year ago. Mobile revenues continued to witness a decline and was down 7.2 per cent year-on-year on an underlying basis led by continued average revenue per user (ARPU) down-trading impacted by competitive pricing pressures, said the company in its results statement.
While Moody's expects that the majority of the $1.25 billion raised from the pre-IPO of its African business will be used to reduce debt, leverage will only improve marginally, the rating agency said.
Moody's views positively the management's plans to engage in further capital-raising activities - including asset sales - which aim to reduce debt levels significantly. However, Bharti is becoming increasingly dependent on a major turnaround of the underlying Indian operations to ensure a sustainable level of financial health supportive of an investment grade rating.
"Because we believe a more rational competitive environment in India's telecommunications market is unlikely over the next 12-18 months, the review also reflects uncertainty as to whether the company's profitability, cash flow situation and debt levels can improve sustainably and materially over the same period," adds DiChiara, who is also Moody's lead analyst for Bharti.
The review will focus on issues like Bharti Airtel’s commitments and plans to substantially reduce debt levels over a short period of time and plans to turnaround the underlying Indian mobile operations.
The ratings could be downgraded if the company fails to use proceeds received from its recent pre-IPO of its African business or its proposed capital-raising activities for debt reduction.
Moreover, any further deterioration in its operating performance, particularly in the Indian mobile segment, such that earnings and cash flows or revenue market share contracts from current levels, would also lead to a downgrade said Moody’s.
JP Morgan research analyst, Viju George noted in a recent report that the strategic investment in Bharti Africa ($1.25 billion from a clutch of investors) will help alleviate the debt burden by only 8 per cent, scarcely enough given the rate of EBITDA decline in India wireless. Bharti’s India wireless EBITDA margins at 21 per cent declined 540 basis points quarter-on-quarter (13.5 per cent year-on-year) largely due to the revenue decline.

India's economic growth to slow down to 7.3% in 2019, 2020: Moody's

Indian economy will expand 7.4 per cent in 2018, but the growth will slow down to 7.3 per cent in the next year as domestic demand tapers on higher borrowing cost due to rising interest rates, Moody's Investors Service said Thursday.
In its report titled Global Macro Outlook 2019-20', Moody's said the economy grew 7.9 per cent in the first half (January-June) of 2018, which reflects post demonetisation base effect.

Stating that borrowing costs have already increased on higher interest rates, Moody's said it expects the Reserve Bank will continue to steadily raise the benchmark rate through 2019, which will further dampen domestic demand.
These factors will limit the pace of the Indian economy's growth over the next few years, with real GDP growth of 7.3 per cent in 2019 and 2020, from around 7.4 per cent in 2018, Moody's said.
It said the greatest downside risk to India's growth prospects stem from concerns about its financial sector.
The impact of higher global oil prices compounded by sharp rupee depreciation raises the cost of households' consumption basket, and will weigh on households' capacity for other expenditures. Borrowing costs have already risen because of tightening monetary policy, it said.
Moody's said, in the short term while measures to stabilise the financial sector are put in place, credit growth is likely to slow.
Downside risks from a prolonged liquidity squeeze for non-bank financial institutions, which could lead to a sharper slowdown in their credit provision, remain, it added.
Moody's said global economic growth will slow in 2019 and 2020 to a little under 2.9 per cent from an estimated 3.3 per cent in 2018 and 2017.
The US-based agency expects trade and geopolitical frictions between the US and China to persist for some time.
This will weigh on the global trade growth and will reshape trade flows and supply chains, Moody's added.

India to grow 7.6% in calendar year 2018 amid note ban disruption: Moody's

Moody's Investors Service on Wednesday estimated that India will grow 7.6 per cent in calendar year 2018 and 7.5 per cent in 2019, amid signs of economic recovery from impact of demonetisation and GST.
"There are some signs that the Indian economy is starting to recover from the soft growth patch attributed to the negative impact of the demonetisation undertaken in 2016 and disruption related to last years rollout of the Goods and Service Tax," it said.
The Budget for 2018-19 includes some measures that could stabilise the rural economy that was disproportionately hit by the demonetization policy and is yet to recover, it said.
"As we have said before, the bank recapitalisation plan should also help credit growth over time, thereby supporting growth," Moody's said.