Prolonged Conflict to Erode Corporate Profitability by 200 Basis Points in FY27: Crisil Stress Test

Crisil Predicts 200 Basis Point Hit to Corporate Profitability Due to West Asia Conflict

Prolonged supply-chain disruptions due to the ongoing conflict in West Asia could shave off corporate operating profitability by 200 basis points (bps) in the current fiscal year, according to a stress test conducted by Crisil Ratings. However, the domestic rating agency expects India Inc to remain resilient on the back of strong balance sheets.

Crisil's stress test revealed that the protracted conflict has prompted domestic companies to realign their supply chains, navigate pricing issues, manage higher fuel and freight costs, and contend with a depreciating rupee. The conflict and disruptions, now in their third month, are expected to exacerbate inflation and amplify demand disruption if prolonged further.

Crisil conducted a stress test of 34 sectors, which account for 65% of its rated corporate debt, assuming supply-chain disruptions could last for nine months this fiscal, compared with six months in its base case. The agency has also assumed crude oil prices averaging USD 110 per barrel for this fiscal year, versus a base case assumption of USD 95.

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The stress test assessed the impact on sectoral revenue, operating profitability, and the resilience provided by balance-sheet strength to determine the impact on credit quality. According to the results, the prolonged supply-chain disruptions could shave off corporate operating profitability by 200 basis points (bps) this fiscal from the pre-conflict expectation of 12%.

However, Crisil analysis showed that 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.

Export-linked sectors such as pharmaceuticals, textiles, readymade garments, shrimp processors, and electronics manufacturers may benefit from the rupee's depreciation, according to Crisil. Managing costs and profitability will be a bigger challenge than achieving topline growth for companies, said Crisil Ratings Managing Director Subodh Rai.

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