Due to the reopening of the Strait of Hormuz after a delicate agreement (MoU) signed between the US and Iran, if this situation continues, then the profit pressure on Indian companies may be significantly reduced in the rest of this financial year. This is a matter of relief compared to what was estimated earlier. CRISIL said in its report that energy markets have reacted immediately to this relief and crude oil prices have softened. However, the availability of essential inputs like gas and urea is expected to improve only gradually, as the supply-side problems faced during the conflict will take time to resolve. The report says that currently the number of ships passing through this strait is much less than the level before the conflict.
Margin estimate changes
The report said that if the agreement remains in place and there are no further disruptions, the operating margin impact on the 34 sectors affected by the conflict will be limited to 100 basis points (down from an estimated ~12 percent before the conflict to ~11 percent this fiscal year). The report said that earlier, considering the possibility of prolonged conflict and closure of the strait, we had estimated the impact of 200 basis points. Also, the demand situation remains strong due to government spending on infrastructure and expectations of stability in consumption. Additionally, a controlled increase in prices to compensate for the increase in input costs should also help earnings realisation.
Oil supply will be normal soon
The report said that our analysis of 34 sectors accounting for 65 percent of rated corporate debt assumes that the supply of crude oil will soon normalize and the average price of Brent will be $ 80-85 per barrel in this financial year. There may be a slight delay in the supply of gas and there is a possibility of disruption for a total of 4 months in this financial year. With the reopening of the strait, India’s dependence on expensive spot gas is also expected to gradually reduce.
Less impact on revenue and margins
According to the report, there will be very little impact on both revenue and margins on 24 sectors and recovery will mainly happen in the second half. At the same time, the remaining 10 sectors may see considerable pressure, where operating margins may fall by one-tenth to one-third compared to pre-conflict estimates. The credit quality outlook for four of these 10 sectors is stable/neutral as balance sheet strength will help absorb the impact of lower profits. At the same time, the credit quality outlook for the remaining six sectors is slightly negative, because they are being affected by factors like loss of one-tenth or more in profits, higher requirement of working capital and average strength of balance-sheet.
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