Strong balance sheets help India Inc absorb West Asia fallout: Crisil

The Crisil Ratings stress test, which covers 34 sectors accounting for 65% of nominal corporate debt, shows India Inc. will remain resilient thanks to strong balance sheets, stable domestic demand and government-led capital spending, enabling it to cope with profitability pressures from the protracted conflict in West Asia that has forced domestic companies to realign supply chains, navigate pricing issues, manage high fuel and freight costs and combat a depreciating rupee.

The rating agency assumed that supply chain disruptions could last nine months this fiscal year (compared to six months in the base case) and that crude oil prices would average $110 per barrel for this fiscal year (versus a base case assumption of $95). To determine the impact on credit quality, the agency evaluated the impact on sectoral revenue, operating profitability and flexibility provided by balance sheet strength.

Based on the results, we conclude that prolonged supply chain disruptions (as part of stress testing) can reduce corporate operating profitability by as much as 200 basis points (bps).

This financial year has seen an increase of 12% from the pre-conflict expectation, with some sectors seeing a more pronounced impact.

Subodh Rai, Managing Director, Crisil Ratings, says: “Managing costs and profitability will be a bigger challenge for companies than achieving top-line growth. 22 out of 34 sectors subjected to stress testing see operating profitability reduced by more than 10% due to high inventory costs and inability to fully transfer the burden to consumers instantly. On the other hand, even a partial pass-through could increase realizations, resulting in a lower impact on revenue growth for most sectors. Additionally, credit profiles will also increase. As a result, nominal corporate “We anticipate that the credit quality of only eight sectors, accounting for 10% of our debt, will be materially affected.”

Over the last decade, corporate India’s median gearing has halved to around 0.5x by March 2026, while interest coverage has also doubled to more than 5x. As a result, strong balance sheets provide India Inc. with ample room to weather profitability pressures arising from the West Asian conflict, thus keeping their credit profile resilient.
Balance sheet strength should maintain this financial position even if working capital needs increase slightly.
Credit quality was supported by policy interventions last year during periods of non-linear events such as the Covid-19 pandemic and tariff difficulties. The recently announced Emergency Credit Line Guarantee Scheme (ECLGS) 5.0 is timely to support MSMEs; It is characterized by limited balance sheet buffers and thus higher vulnerability to global crisis.
West Asia conflict – easing credit quality pressures.
Crisil Ratings said the ceramics industry would be hardest hit due to supply-side disruptions caused by gas shortages in certain regions, which could cut revenue by a third and profitability by half. Seven sectors are expected to see a moderate negative impact on their credit quality, mainly due to lower operating profitability.

For six of these, operating profitability is expected to fall by one-tenth to one-third, while for the seventh airlines, profitability is expected to fall by approximately 50%. Airline industry will be affected by airspace closure, high fuel cost and rupee depreciation

Crude oil-related industries, including manufacturers of polyester textiles, specialty chemicals and flexible packaging, will only partially offset the higher costs; This may happen with a delay.
Auto component manufacturers will have limited flexibility to pass on higher production costs in the aftermarket and may see the pass-through of higher input and freight costs

Sourcing alternative centers for diamond polishers will increase supply costs and impact business profitability. Basmati rice exporters will see lower purchases from key markets, affecting revenue and operating efficiency.

Regarding rupee depreciation, Crisli’s analysis shows that most companies either have a natural hedge through trading or have forward cover for forex risks. Where natural protections are lacking, such as the edible oil industry, companies have consistently demonstrated the ability to pass on high costs to end users. Additionally, the share of foreign currency borrowings in India Inc.’s corporate debt is low and largely hedged.

Pharmaceuticals, textiles, ready-made garments, shrimp processors and electronics manufacturers from export-dependent sectors may benefit from the depreciation of the rupee.

Somasekhar Vemuri, Senior Director, Crisil Ratings, said: “While our outlook for India Inc.’s credit quality remains stable, supported by strong corporate balance sheets and stable domestic demand, we maintain a cautious stance due to the uncertain trajectory of the West Asian conflict. If the period of conflict and stability extends further, supply disruptions will further worsen inflation and increase demand disruption. Therefore, critical watchdogs are the magnitude of the conflict and the extent and duration of the rise in fuel prices because these are overall may affect our assessment of credit quality.”