We are seeing some slowdown in the economy. The second-quarter GDP numbers are also not encouraging. What is your sense of the macro picture?
Corporate earnings in the second quarter have slowed down, but we are optimistic that in the next two quarters, this should be improving. There was election impact in the first quarter and in the second quarter somehow the overall consumption did not pick up to the extent that it should have. But we feel there should be some improvement in quarters three and four. Post the second quarter numbers, GDP could be closer to 6.8% than 7% as we had previously expected. But the long-term trajectory remains positive. Yes, sentiments have indeed been impacted to some extent. If you look at the financial services sector, recent RBI actions on unsecured loans, lending rates, and other developments in the sector are indicative of the fact that the regulator is having a watchful eye. Secondly, private sector capex is still in a bit of wait-and-watch, but the good thing is order book positions make us believe that we should be witnessing something better in the medium to long term.
What explains the slowdown in consumption?
The overall inflationary trend could be impacting households’ purchase decisions and spending patterns, but now even urban consumption has been impacted, as we have been witnessing in the FMCG sector. But from our medium-to-long-term trajectory, we are still retaining our positive outlook. But if it persists like this, then the overall growth trajectory could witness a bit of a slowdown. A prolonged phase like this could be counterintuitive for the long-term India story that we all were having a lot of positive views about till about six months back.
Which sectors do you think are better placed than the rest? Won’t the new administration in the US have a bearing on India’s exports?
One statistic which surprised us is that exports have finally shown some good growth. Global developments had an impact, but now we have seen some good numbers coming. The hospitality sector continues to do well. In core sectors, with the kind of order books we are witnessing in infrastructure, we feel are likely to benefit. Going by the past Trump presidency, he would weigh his options. If he were to go as per his pronouncements on China, then some other country would have to fill the gap. To that extent, I think India as an alternative to China can weigh in. It all depends on how we play our cards, but his term is always going to be transactional in nature. So we will have to take it from deal to deal, sector to sector rather than taking a holistic view.
How are you looking at the Adani Group in light of the US indictment?
Our team has interacted with the group and taken their perspective. It is very premature to have any conjecture in terms of what trajectory it could be taking. We will be in constant touch with the group’s management. The group’s rating varies from BBB to AA category because it is essentially an infrastructure-led group. This group has to be best assessed from a vertical-to-vertical proposition because each vertical has a different risk paradigm. Ports is different, power is different, and aviation and then airports would be different. Green and other cement businesses would be different. It’s not as if that one rating in a particular company consents into the rating in any other vertical because each vertical is separate. The overall funding mix also changes from vertical to vertical, in the sense that some businesses could potentially be having a significant chunk of the foreign currency borrowings. So an assessment of the entire mix, juxtaposing it against the cash flow generations drives our rating decisions.Adani also has a lot of foreign currency borrowings. This indictment is also in a country which corners a large pool of global capital. How do you think it will impact them?
As has been given to understand, there are no covenants which are triggering any kind of immediate repayments. Yes, with this kind of a development, they would also be taking their own time in terms of raising money. They don’t seem to be having any immediate plans in terms of tapping these markets. Many of their businesses are listed, so we will also keep on evaluating how it’s impacting the overall funding requirements. None of the companies have been indicted; it’s an individual-level thing, but yes the individual happens to be the chairman. They are also evaluating all legal options in this regard. It is a situation where everybody will observe what shape it takes in the future.
Two years ago you said that you wanted to bring down the rating business revenues from 95% to 80%. What is the progress on that front?
We are now down to 90%, so non-rating businesses are contributing around 10% of revenues on the back of a rock-solid growth in the ratings business itself. These are analytics, risk management solutions for banks and financial institutions and consulting and advisory including ESG advisory. The third is ESG ratings for which we got the licence in May. Risk analytics and consulting advisory are the major drivers and both have posted growth of around 35%. By FY27 we should be closer to around 20% non-rating revenue. All this even as the rating business is showing 15% growth. Increasing non-rating contribution does not mean slowing down. Both the pies are growing, just that non-ratings is at a lower base and is growing faster.