West Asia Tensions May Cut India Inc Profit Impact by Half if Truce Holds: Crisil

Crisil Ratings has revised its assessment of the impact of the recent West Asia conflict on Indian corporates, stating that the effect on profitability is now expected to be about half as severe as initially projected, provided the US-Iran ceasefire remains in place and energy supplies continue to normalise.

The ratings agency now estimates that the conflict could reduce India Inc's operating margins by around 100 basis points in fiscal 2027, compared with its earlier estimate of 200 basis points under a prolonged conflict scenario that included disruptions to shipping through the Strait of Hormuz.

The revised outlook follows a correction in crude oil prices after the reopening of the Strait of Hormuz under a fragile US-Iran memorandum of understanding. However, Crisil noted that geopolitical risks remain elevated and gas supply normalisation could take longer.

Subodh Rai, Managing Director, Crisil Ratings, said:

"If the armistice sustains, two-thirds of the 34 sectors (we assessed) will see minimal disruption, with margin recovery in the second half mostly offsetting pressures of the first half. But the risk of conflict escalation persists, so we foresee corporate India staying cautious and continuing to focus on supply-chain diversifications."

Crisil's assessment covers 34 sectors, representing approximately 65 per cent of rated corporate debt. The analysis assumes Brent crude averages USD 80-85 per barrel this fiscal and that gas supply disruptions persist for around four months.

Under the revised scenario, only 10 sectors are expected to experience a meaningful decline in profitability, compared with 22 sectors under the agency's earlier stress-case assumptions. None of the sectors are expected to face a severe impact on either revenues or profitability.

The sectors expected to remain under pressure include airlines, ceramics, flexible packaging, specialty chemicals, polyester textiles and diamond polishing, reflecting higher input costs, weaker pricing power and supply-chain disruptions.

According to the report, these six sectors carry a moderately negative credit outlook because of weaker profitability, higher working capital requirements and moderate balance-sheet strength.

Crisil stated that lower crude prices and gradually improving gas availability are expected to provide relief to most industries. Continued government infrastructure spending and stable domestic demand are also expected to support revenue growth.

The agency added that policy support would help ease working capital pressures. It cited the government's Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, which provides additional guaranteed credit of Rs 2.55 lakh crore, including Rs 5,000 crore for airlines, to assist vulnerable MSMEs in managing higher funding requirements.

Oil marketing companies and fertiliser manufacturers are expected to be among the sectors benefiting from lower energy prices. Crisil estimates that state-run fuel retailers incurred net under-recoveries of Rs 40,000-45,000 crore between March and May, but expects them to return to operating profitability during the current fiscal as crude prices decline.

Despite the revised outlook, Crisil identified two major risks. These include the interim and non-binding nature of the US-Iran understanding, which leaves open the possibility of renewed conflict, and the emergence of El Niño conditions that could weaken monsoon rainfall and affect rural demand.

Somashekar Vemuri, Senior Director, Crisil Ratings, said:

"The correction in crude prices and the gradual easing of both shipping-related costs and gas supplies provide timely relief to India Inc. While supply-side pressures are expected to abate, the geopolitical situation in West Asia remains fluid and escalation risks persist. Softer crude prices would support the government's ability to sustain its capital expenditure push and respond to any demand-side impact."