NEW DELHI: The profitability impact of the recent West Asia conflict on corporate India is likely to be about half as severe as initially feared if the US-Iran ceasefire holds and energy supplies continue to normalise, Crisil Ratings said.
The ratings agency said it now expects the conflict to shave around 100 basis points off India Inc's operating margins in fiscal 2027, compared with its earlier estimate of a 200-basis-point hit under a prolonged conflict scenario that included disruption to shipping through the Strait of Hormuz.
The revised outlook follows a sharp correction in crude oil prices after the reopening of the Strait of Hormuz under a fragile US-Iran memorandum of understanding, although Crisil cautioned that geopolitical risks remain elevated and gas supplies could take longer to normalise.
"If the armistice sustains, two-thirds of the 34 sectors (we assessed) will see minimal disruption, with margin recovery in the second half mostly offsetting pressures of the first half," said Subodh Rai, Managing Director, Crisil Ratings.
"But the risk of conflict escalation persists, so we foresee corporate India staying cautious and continuing to focus on supply-chain diversifications."
Crisil's assessment, covering 34 sectors that account for about 65 per cent of rated corporate debt, assumes Brent crude averages USD 80-85 per barrel this fiscal and gas supply disruptions persist for around four months.
Under the revised scenario, only 10 sectors are expected to witness a meaningful decline in profitability, compared with 22 sectors under the agency's earlier stress-case assumptions. None of the sectors are expected to face a severe hit to either revenues or profitability.
Among the sectors expected to remain under pressure are airlines, ceramics, flexible packaging, specialty chemicals, polyester textiles and diamond polishing, reflecting higher input costs, weaker pricing power and supply-chain disruptions.
Six sectors - including airlines, ceramics, polyester textiles, specialty chemicals, flexible packaging and diamond polishing - carry a moderately negative credit outlook because of weaker profitability, higher working capital requirements and moderate balance-sheet strength, Crisil said.
The agency said lower crude prices and gradually improving gas availability would provide relief to most industries, while government infrastructure spending and steady domestic demand should continue to support revenue growth.
Policy support is also expected to cushion working capital pressures.
Crisil said the government's Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, which provides additional guaranteed credit of Rs 2.55 lakh crore, including Rs 5,000 crore for airlines, would help vulnerable MSMEs manage higher funding requirements.
Oil marketing companies and fertiliser manufacturers are likely to be among the biggest beneficiaries of easing energy prices.
Crisil estimates state-run fuel retailers incurred net under-recoveries of Rs 40,000-45,000 crore between March and May, but expects them to return to operating profitability this fiscal as crude prices retreat.
Despite the improved outlook, Crisil warned that two key risks remain: the interim and non-binding nature of the US-Iran understanding, which leaves open the possibility of renewed conflict, and the emergence of El Nino conditions that could weaken monsoon rains and dampen rural demand.
"The correction in crude prices and the gradual easing of both shipping-related costs and gas supplies provide timely relief to India Inc. While supply-side pressures are expected to abate, the geopolitical situation in West Asia remains fluid and escalation risks persist," said Somasekhar Vemuri, Senior Director, Crisil Ratings.
"Softer crude prices would support the government's ability to sustain its capital expenditure push and respond to any demand-side impact."
