The reopening of the Strait of Hormuz following a US-Iran memorandum of understanding, if sustained, will limit the impact on India Inc's operating margins to approximately 100 basis points this fiscal, according to a Crisil Ratings assessment issued Thursday. The estimate is half the 200 basis points Crisil had projected earlier.
Crisil's analysis of 34 sectors, representing 65 per cent of rated corporate debt, now projects operating margins at approximately 11 per cent, against the 12 per cent expected before the conflict. The earlier stress scenario had assumed a prolonged conflict and closure of the Strait lasting up to three quarters.
The assessment finds that crude oil supplies will normalise swiftly, with Brent averaging USD 80-85 per barrel, while gas supply disruptions are assumed to last approximately four months.
Supply Normalisation Gradual, Shipping Yet To Recover
Energy markets have responded to the ceasefire with crude prices softening. However, the availability of gas and urea is expected to improve only gradually as structural supply-side disruptions are resolved. Ships transiting the Strait currently remain well below pre-conflict levels.
Of the 34 sectors analysed, 24 are expected to see minimal impact on both revenue and margins, with recovery largely backloaded to the second half of the fiscal year. The remaining 10 sectors face a meaningful squeeze, with operating margins declining by one-tenth to one-third compared with pre-conflict estimates.
For four of these 10 sectors, the credit quality outlook is stable or neutral as balance sheet strength is expected to cushion the profitability impact. For the remaining six sectors, the credit quality outlook is moderately negative owing to a one-tenth or more impact on profitability, higher working capital requirements, and moderate balance sheet strength.
Sectors facing meaningful margin pressure include airlines, where first-half compression is unlikely to fully reverse given currency pressures and constrained pricing power; ceramics, where elevated fuel costs and limited gas availability will compress margins in the first quarter with only partial recovery expected; commodity-linked sectors including flexible packaging, specialty chemicals and polyester textiles, where elevated input costs and limited pass-through ability will weigh on margins; and diamond polishing, where persistent demand disruptions will delay recovery in both volume and profitability.
Crisil noted that no sector is expected to witness a high impact on either revenue or profitability at this juncture.
OMCs And Fertiliser Sector See Sharp Turnaround
Among the 24 sectors expected to see minimal impact, oil marketing companies and fertiliser manufacturers stand out for a sharp turnaround in profitability. Between March and May, net under-recoveries for oil marketing companies are estimated at Rs 40,000-45,000 crore. Even if excise duties were reverted to pre-conflict levels with retail fuel prices unchanged, oil marketing companies are likely to report operating profits for this fiscal.
The fertiliser sector, supported by priority gas allocation, is expected to see limited profitability impact as supply conditions improve and subsidy support remains intact. The government's fertiliser subsidy outlay is now estimated at Rs 2.4-2.6 lakh crore for this fiscal, approximately Rs 15,000 crore lower than earlier projections.
On the policy support front, the Emergency Credit Line Guarantee Scheme 5.0 provides additional credit flow of Rs 2.55 lakh crore, including Rs 5,000 crore earmarked for airlines. As of 9 June, over Rs 48,000 crore of guarantees had been approved, according to the Ministry of Finance.
Two factors temper the otherwise stable credit quality outlook. First, El Niño conditions are expected to result in below-normal rainfall, posing a risk to rural demand. Second, the US-Iran MoU remains interim and non-binding, keeping the risk of fresh conflict elevated. |
