Fitch slashes India growth forecast to 30-year low of 2% for FY21

Fitch Ratings on Friday said it has slashed India's growth forecast for the current fiscal to a 30-year low of 2 per cent, from 5.1 per cent projected earlier, as economic recession gripped global economy following the lockdown due to COVID-19 pandemic.

"The initial disruptions to regional manufacturing supply chains from a lockdown in China as the coronavirus spread have now broadened to include local discretionary spending and exports even as parts of China return to work.

"Fitch now expects a global recession this year and recently cut our GDP growth forecast for India to 2 per cent for the fiscal year ending March 2021 after lowering it to 5.1 per cent previously, which would make it the slowest growth in India over the past 30 years," it said in a statement.

On March 20, Fitch had projected India's GDP growth for 2020-21 at 5.1 per cent, lower than 5.6 per cent estimated in December 2019.

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Fitch also said micro, small and medium-sized enterprises and the services segment are likely to be among the most affected amid reduced consumer spending.

NBFCs' business borrowers are typically smaller with more limited cash buffers, and any material fall in earnings is likely to affect their ability to repay their loans directly, it said in the statement.

"The challenges for India's non-bank financial institutions (NBFI) will intensify as local measures to contain the spread of the coronavirus exert pressure on their operating performance and financial profiles. Government-imposed activity restrictions in India will raise operational complications for the NBFIs, while any escalation in local infections would deal a blow to economic sentiment.

"These developments threaten to derail the incipient recovery in India's credit environment following the NBFI crisis in 2018-2019, and Fitch has taken negative action on our rated Indian NBFI portfolio in light of these risks," the agency said.

The RWN (Rating Watch Negative) placed on the ratings of Fitch-rated Indian NBFIs reflects heightened uncertainty over their credit profiles due to the authorities' measures to contain the spread of COVID-19, it added.

Last week, Moody's Investors Service sharply cut India's growth forecast for calendar 2020 to 2.5 per cent from 5.3 per cent estimated earlier.

Coronavirus impact: Fitch cuts India growth forecast to 5.1% for FY21

Fitch Ratings on Friday cut India's growth forecast to 5.1 per cent for FY 2020-21, saying the coronavirus outbreak is likely to hit business investment and exports.

Fitch had in December 2019 projected India's growth at 5.6 per cent for 2020-21 and 6.5 per cent in the following year.

In its Global Economic Outlook 2020, Fitch said the number of people affected by coronavirus will keep rising in the coming weeks but that the outbreak will remain contained. However, there are downside risks to this scenario.

"Supply-chain disruptions are expected to hit business investment and exports. We see GDP growth to remain broadly steady at 5.1 per cent in the fiscal year 2020-2021 following growth of 5.0 per cent in 2019-2020," Fitch said.

For 2021-22, Fitch projected India's growth to be 6.4 per cent.

"The outbreak of the virus is hitting sentiment, while local governments have rolled out measures to contain the spread of the virus, such as closing schools, cinemas and theatres. While India's linkages with China (e.g. trade and tourism) are modest, manufacturers in India are heavily reliant on key Chinese intermediate inputs especially of electronics and machinery and equipment," Fitch said.

The WHO has declared coronavirus pandemic. Over 2 lakh people have been infected globally and the disease caused by it COVID-19 has claimed over 9,000 lives. In India, there are about 195 positive cases and 4 deaths so far from the deadly virus.

"Fragilities in the financial system will further undermine sentiment and domestic spending. The overall financial system remains burdened with weak balance sheets, which will limit any upside to credit and growth despite policymakers' efforts in recent months to ease stresses, Fitch added.

Fitch revises outlook on Vedanta-led Cairn India from stable to negative

Fitch Ratings has revised its outlook on Cairn India Holdings Ltd (CIHL) to negative from stable saying in its assessment the consolidated credit profile of the company's owner, Vedanta is expected to weaken on lower metal prices.

Vedanta owns half of its 70 per cent in the prolific Rajasthan oil block through Cairn India Holdings Ltd (CIHL).

In a statement, Fitch Ratings said it has revised its outlook on CIHL to negative from stable and affirmed the Long-Term Issuer Default Rating (IDR) of 'BB-'.

"The Outlook revision reflects Fitch's assessment that the consolidated credit profile of CIHL's owner, Vedanta Ltd (VLTD), is expected to weaken in the financial year ending March 2020 (FY2020) and FY22, after we recently lowered our long-term mid-cycle metals and mining price assumptions, including aluminium and copper price assumptions, due to falling demand," it said.

This has reduced CIHL's headroom at the current rating level. CIHL's rating is aligned with the consolidated credit profile of Vedanta, which owns 100 per cent of CIHL, reflecting their strong linkages.

"Our assessment reflects the group's complex shareholding structure and the risk of cash leakages other than dividend distributions to parties outside of ultimate parent Vedanta Resources," Fitch said.

In January 2019, CIHL invested in a structured product of Volcan Investments Ltd, a shareholder of Vedanta Resources, although the investment was subsequently unwound profitably in August 2019.

"The transaction raised concerns from investors, including Vedanta Ltd's minority stakeholders, and led to declines in its share and bond prices. Vedanta Resources has since committed to abstain from similar transactions; Fitch will monitor Vedanta Resources to see if any group entities provide further support to Volcan that could weaken their liquidity and hence VLTD's credit profile. The current assessment does not factor any cash outflow aside from dividends to Vedanta Resources," it said.

CIHL has participatory interest in an oil and gas block in Rajasthan where all fields are producing. CIHL's production scale, based on its 35 per cent share of the block, is small at about 66,000 barrels of oil equivalent per day (boepd) and comparable to that of oil and gas producers in the 'B' category.

CIHL, however, benefits from the low-cost structure of the Rajasthan block with operating costs of around $ 7.5 per barrel (bbl) and finding and development costs of about USD 5-6/bbl. "The cost position is significantly lower than that of peers and supports its strong operating cash flow. This underpins CIHL's positive free cash flow - despite its planned investments of around USD 1 billion over the next four years - and its continuing strong financial profile with a net cash position," it said.

Fitch said CIHL's investments at the Rajasthan block are expected to increase their proven (1P) and probable (2P) reserves. Management expects the company's 2P reserve base to increase by about 100 million boe in due course, enhancing the reserve life to about ten years from eight years, in line with the increase in the exploration and appraisal capex.

CIHL's share of 1P and 2P reserves in the Rajasthan block was about 112 million boe and 180 million boe, respectively, at FYE19, resulting in proved reserve life (based on 1P reserves) of about five years. The company's exploration capex slowed in the last few years due to the decline in global crude oil prices.

The company expects the profitability and volumes improvement mainly from their aluminium and zinc business segments, to result in better financial metrics as compared to Fitch's expectations.

"If the company is successful in demonstrating a better performance, Fitch may revise the Outlook back to Stable," it said. "However further sustained weakness in the company's consolidated financial metrics over the coming quarters, could result in a downward rating action."

CIHL's Standalone Credit Profile (SCP) of 'b+' is driven by its concentrated and small scale of operations, which are counterbalanced by its low-cost position and strong standalone financial profile.

Fitch said it expects Vedanta's consolidated financial profile to be weaker than earlier estimates based on revised metal price assumptions and minor downward revisions to the 2019-20 operational assumptions based on year to date trends.

Vedanta fully owns CIHL and both entities hold equal shares of 35 per cent in the group's largest oil and gas block at Rajasthan. Vedanta is also the operator of the Rajasthan block.

Oil and gas business is the second-largest contributor to Vedanta's EBITDA, after the Indian zinc operations. "We believe oil and gas will remain strategically important to Vedanta, given its low-cost operations and significant earnings contribution," it said.

Fitch lowered its long-term mid-cycle metals and mining price assumptions - most significantly for aluminium, cutting prices by 6 per cent in 2019-20, 15 per cent in 2020-21 and 13 per cent in 2021-22.

Aluminium faces a challenging outlook due to weakened demand, primarily from the automotive sector, and increasing supply from China (expected to rise by 7.1 per cent in 2020), which is unlikely to be deferred, it said adding the impact of lower prices is expected to be cushioned by falling input costs.

The rating agency reduced Vedanta Resources' EBITDA estimates over 2019-20, 2020-21 and 2021-22 by 7 per cent, 7 per cent and 9 per cent respectively, with a large part stemming from lower long-term mid-cycle metals and mining price assumptions.

Banks need Rs 50,000 cr additional capital to support loan growth: Fitch

Indian banks need an additional $7 billion (Rs 50,000 crore) equity by 2020-21 to support loan growth and cover for bad loans, Fitch Ratings said on Tuesday adding a slowing economy could exacerbate asset-quality tension for a sector grappling with weak recoveries and ageing provisions.

In its 2020 Outlook for 'Asia-Pacific Emerging Market Banks', the rating agency maintained a negative outlook on Indian banks, based on its expectations of continued weak performance despite trends showing this could be past the trough, and ongoing capital requirements.

"Non-bank stress coupled with rising macro headwinds pose further challenges for asset quality, particularly at state banks which continue to experience capital constraints, delays in bad-loan recoveries, and poor earnings. More capital is needed to insulate the banks' weak balance sheets and to sustain loan growth," it said.

Fitch said the rating outlook for most Indian banks mirrors the stable outlook on India's sovereign rating.

It estimated that "Indian banks will require an additional USD 7 billion of equity by FY'21 (2020-21) to support loan growth, achieve 75 per cent NPL (non performing loan) cover, and build a buffer over the minimum Basel III capital standards."

Public sector banks will require most of this capital as the USD 10 billion being injected into banks in 2019-20 will go mainly towards bridging regulatory capital gaps, providing for ageing impaired loans, and absorbing the costs of merging 10 state banks into four by April 2020.

"A slowing economy could exacerbate asset-quality tensions for a sector which is already grappling with weak recoveries and ageing provisions," it said. "The improvement in the impaired-loans ratio in 2018-19 is unlikely to be sustained if stresses on non-banks, real estate and SMEs remain unresolved, due to both tight liquidity and the macroeconomic slowdown."

Net interest margins (NIMs) are likely to face pressure as floating-rate loans have to be linked to external benchmarks in a bid to ensure effective monetary transmission, it said.

"This will cause a further narrowing in state banks' income buffers which have declined in recent years due to poor asset quality and lower growth, leaving both earnings and equity vulnerable to higher-than-expected credit costs."

Fitch said the systemic stress across non-banks would deal a significant setback to recovery in the banking sector, reversing recent improvements in performance, and posing solvency risks to banks with the thinnest buffers.

Fitch conducted a stress test to examine the potential impact on banks of pressures on NBFCs developing into a broad crisis.

"We estimate that the scenario would leave banks with an aggregate shortfall of USD 10 billion to meet regulatory minimums, and USD 50 billion below the level that we believe would provide an adequate buffer," it said.

Huawei's pain may be Samsung's gain in the ongoing trade war, says Fitch

Samsung Electronics Co Ltd may have a chance to strengthen its position in the smartphone market due to the hurt caused to Huawei Technologies Co Ltd in the wake of US-China trade tensions, according to Fitch Ratings.

Tech companies, including Google and SoftBank Group-owned chip designer ARM, have said they will cease supplies and updates to Huawei.

The loss of access to Google's android system may hurt the smartphone sales of the Chinese technology company outside China, thereby giving Samsung a chance to improve its market share, Fitch Ratings said in a statement.

Earlier this month, the US government hit Huawei with severe sanctions as the US Commerce Department blocked the Chinese company from buying American goods amid its escalating trade spat with China.

The ratings agency also added that iPhone maker Apple Inc could be another casualty of the trade tensions between Beijing and Washington, which would accelerate its market share loss in China.