Post-demonetisation credit profile of large corporates is likely to be neutral: India Ratings

Post-demonetisation the credit profile of large corporates with revenue of over Rs 250 crore is likely to be neutral with no significant changes in their ratings, India Ratings and Research said on Thursday. 

In a surprise move to curb black money, corruption and terrorism, prime minister Narendra Modi on November 8 last year announced demonetisation of old currency notes of Rs 500 and Rs 1,000 as legal tender from the economy resulting in cash crunch across the country.  

“Based on a sensitivity analysis of all corporates in our portfolio India Ratings believes large corporates have sufficient liquidity buffers to meet debt servicing obligations,” cited the ratings agency in a press release. 

It said the impact of demonetisation has been varied depending on the extent and nature of cash usage within an industry. 

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To substantiate it, the ratings agency said the immediate impact of demonetisation on revenues of large corporates in the third quarter (Q3) of fiscal year 2016-17 (FY17) ranges from nil for the export-oriented sectors namely IT/ITeS, to a significant impact on the auto, real estate, gems and jewellery sectors, with a gradual recovery expected as the cash availability improves in the fourth quarter (Q4) of FY17.

It believes that even though there was cash crunch which impacted some sectors in the third quarter (Q3) of FY17 the impact of demonetisation on their credit profiles was not significant due to availability of sufficient funds in the form of cash, unutilised working capital limits, among others. 

“Despite the cash shortage hurting some sectors significantly in Q3 FY17, the impact on their credit profile is cushioned by the availability of sufficient liquidity (in the form of cash and equivalents or unutilised working capital limits) to meet the debt servicing obligations. India Ratings believes large corporates also have sufficient rating headroom to absorb the transitory impact on revenue, profitability and working capital,” India Ratings and Research said in a statement. 

The ratings agency noted that there has been no impact on demonetisation on export-focused pharmaceuticals and IT/ITES sectors.

However, it said there has been marginal impact of demonetisation on revenue of sectors like domestic-focused pharmaceuticals, healthcare and construction with recovery in long run. 

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Similarly, it has predicted a significant impact of demonetisation on revenue of sectors like auto, auto ancillaries, cement and steel during the cash shortage period with further recovery in the sectors as the availability of cash improves in the economy.

“Sectors which rely on consumer spending saw a fall in sales during the cash shortage period, with eventual recovery once normalisation of cash availability is achieved. The extent of impact would depend on the level of discretion involved in spending (impact on hospitals is lower compared to auto or luxury retail) and the proportion of transactions in cash,” cited India Ratings and Research in  a statement. 

On impact on real estate, gems and jewellery sectors, it said that these sectors witnessed a significant impact on their revenues during the demonetisation period and its impact on these sectors will remain long lasting. 

“A couple of sectors wherein the nature of cash usage is often considered dubious (such as real estate, gems and jewellery) faced a significant fall in sales during the cash shortage period, with a lasting impact on the sector and the sector adapting to a new normal, especially in the unorganised segment. Organised players and large corporates in such sectors will benefit in the long-run,” India Ratings and Research said.

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