Crisil Ratings Lowers India Inc. Profitability Impact Forecast Amid Easing Middle East Tensions

The Middle East conflict had triggered concerns across global markets as tensions around the Strait of Hormuz threatened energy supplies and raised fears of slower economic growth. However, with the US and Iran reaching a ceasefire and energy markets showing signs of stabilisation, the outlook has improved. Crisil Ratings now expects the impact on corporate India's profitability to be significantly lower than previously feared, projecting a 100-basis-point decline in operating margins in fiscal 2027, compared with its earlier estimate of a 200-basis-point hit under a prolonged conflict scenario involving disruptions to shipping through the Strait of Hormuz. The improved outlook follows the reopening of the Strait of Hormuz and a subsequent fall in crude oil prices under a fragile US-Iran memorandum of understanding. Even so, Crisil cautioned that geopolitical uncertainty remains elevated and gas supply disruptions may take longer to ease.

Fewer sectors expected to be affected

According to the agency's latest assessment, only 10 of the 34 sectors it tracks are now expected to face a meaningful decline in profitability. Under its previous stress-case assumptions, that number stood at 22 sectors. Crisil also said none of the sectors are likely to experience a severe impact on revenues or profitability. Its analysis covers sectors representing nearly 65% of rated corporate debt and is based on Brent crude averaging $80-85 per barrel during the current fiscal year, while disruptions to gas supplies continue for roughly four months.

Sectors still under pressure

Among the sectors expected to remain vulnerable are airlines, ceramics, flexible packaging, specialty chemicals, polyester textiles and diamond polishing. These industries continue to face pressure from higher input costs, supply-chain challenges and limited pricing power. Crisil said six sectors, airlines, ceramics, polyester textiles, specialty chemicals, flexible packaging and diamond polishing, currently carry a moderately negative credit outlook because of weaker profitability, higher working capital needs and moderate balance-sheet strength.

Relief from lower energy prices and policy support

At the same time, easing energy prices are expected to provide relief across much of the corporate sector. The agency said lower crude prices and a gradual improvement in gas availability should support profitability, while government infrastructure spending and steady domestic demand are likely to underpin revenue growth. Additional policy support could also help businesses manage funding requirements. Crisil pointed to the government's Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, which offers additional guaranteed credit of Rs 2.55 lakh crore, including Rs 5,000 crore earmarked for airlines. The scheme is expected to help vulnerable MSMEs cope with increased working capital pressures.

Oil marketing firms, fertiliser makers to benefit

The biggest gains from softer energy prices are likely to accrue to oil marketing companies and fertiliser manufacturers. Crisil estimated that state-run fuel retailers suffered net under-recoveries of Rs 40,000-45,000 crore between March and May. However, it expects these companies to return to operating profitability during the current fiscal year as crude prices moderate.

Escalation risks remain

"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," said Subodh Rai, managing director, Crisil Ratings. "But the risk of conflict escalation persists, so we foresee corporate India staying cautious and continuing to focus on supply-chain diversifications." Despite the more favourable outlook, Crisil highlighted two major risks that could alter the scenario. The first is the temporary and non-binding nature of the US-Iran understanding, which leaves open the possibility of renewed hostilities. The second is the emergence of El Nino conditions that could weaken monsoon rainfall and affect rural demand. "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," said Somasekhar Vemuri, senior director, Crisil Ratings.