Prolonged conflict to shave 200 bps off corporate profitability in FY27: Crisil stress test

Prolonged West Asia conflict may cut corporate operating profitability by 200 basis points, but India Inc's strong balance sheets will help it remain resilient.

Prolonged supply-chain disruptions due to the protracted conflict in West Asia could shave off corporate operating profitability by 200 basis points (bps) in the current fiscal year, but India Inc will remain resilient on the back of strong balance sheets, a Crisil stress test revealed on Monday.

The domestic rating agency further said the protracted conflict has been goading domestic companies to realign supply chains, navigate pricing issues, manage higher fuel and freight costs, and contend with a depreciating rupee.

Crisil Ratings Senior Director Somasekhar Vemuri said if the strife and the stabilisation period are prolonged further, supply hiccups would exacerbate inflation and amplify demand disruption.

''Therefore, the crucial monitorables are the magnitude of the conflict and the extent and duration of the increase in fuel prices because these can impact our assessment of overall credit quality,'' Vemuri said.

With the conflict and disruptions into their third month and the situation still evolving, Crisil conducted a stress test of 34 sectors, which account for 65 per cent of its rated corporate debt.

Crisil has assumed supply-chain disruptions could last for nine months this fiscal (compared with six months in its base case), with crude oil prices averaging USD 110 per barrel for this fiscal year (versus a base case assumption of USD 95).

It assessed the impact on sectoral revenue, operating profitability and the resilience provided by balance-sheet strength to determine the impact on credit quality.

''Based on the results, we infer that the prolonged supply-chain disruptions (as part of the stress test) could shave off corporate operating profitability by 200 basis points (bps) this fiscal from the pre-conflict expectation of 12 per cent, with some sectors seeing a more pronounced impact,'' Crisil said in a statement.

From a credit-quality perspective, however, Crisil analysis showed India Inc will remain resilient on the back of strong balance sheets, steady domestic demand and government-led capital expenditure, enabling it to navigate profitability pressures stemming from the lingering geopolitical uncertainties.

Crisil Ratings Managing Director Subodh Rai said managing costs and profitability will be a bigger challenge than achieving topline growth for companies.

Crisil foresees the credit quality of only eight sectors, accounting for 10 per cent of its rated corporate debt, being materially impacted.

Among export-linked sectors, pharmaceuticals, textiles, readymade garments, shrimp processors and electronics manufacturers may benefit from the rupee's depreciation.