Rising domestic demand coupled with slack utilisation rates will help debt-burdened India Inc to draw some relief over the next two years as earnings will grow faster than debt, enabling them to meet higher demand without further investments, says a report.
"We foresee a profit upcycle for India Inc, as revenues expand but capital expenditure stays flat," S&P Global Ratings said in a report today.
It sees the median corporate revenue increasing 12-14 per cent over the next 24 months, or about 500 bps higher than the past three years' average. Earnings should rise even faster than revenues, helping corporates continue the deleveraging trend seen over the last two years.
These growth expectations are anchored in continuing strong domestic demand and growth that are lower than the peak seen in the previous cycle, the report added.
"Corporate leverage is set to decline as companies earn more than they spend over the next two years," the report says, adding however some sectors will buck the deleveraging trend amid a scramble to acquire bankrupt steel and power assets. Also, a small subset of companies will continue to be highly indebted.
The report is based on the analysis of sales, spending, and profits of 250 listed companies.
Excess capacity will essentially create high operating leverage over the next two years, helping companies utilise spare capacity rather than investing in new facilities to meet incremental demand. As a result, profitability will improve over the next two years.
"Operating margins are set to expand by 100 basis points on average, against a median margin of 15 per cent in fiscal 2018," said the agency.
"In the long-term, however, we do not anticipate that corporates will keep the gains from deleveraging. Given high growth and rapid changes in several consumer markets, they will not be able to maintain market share without higher spending, it said, adding the uncertainty leading into the forthcoming general elections can also weigh on business confidence and activity.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)