A prolonged conflict in West Asia could shave around 200bps (basis points) off the operating profitability of Indian companies this fiscal, even as overall credit quality is expected to remain resilient due to strong corporate balance sheets and steady domestic demand, according to a stress test conducted by CRISIL Ratings.
The ratings agency said the ongoing geopolitical tensions in West Asia, now entering their third month, are forcing Indian companies to realign supply chains, deal with elevated fuel and freight costs, manage pricing pressures and contend with a depreciating rupee.
CRISIL conducted a stress test covering 34 sectors that account for around 65% of its rated corporate debt portfolio. The exercise assumed supply-chain disruptions would continue for nine months during the current fiscal, compared with six months in its base-case scenario, while crude oil prices were assumed to average US$110/barrel against a base assumption of US$95/barrel.
Based on the analysis, CRISIL estimated that corporate operating profitability could decline by around 200bps this fiscal from the pre-conflict expectation of around 12%, with several sectors facing a significantly sharper impact.
“For companies, managing costs and profitability will be a bigger challenge than achieving topline growth,” said Subodh Rai, managing director (MD) of CRISIL Ratings.
“Of the 34 sectors stress-tested, 22 would see operating profitability being culled more than 10% due to higher inventory costs and inability to fully pass on the burden to consumers immediately,” Mr Rai said.
He added that although revenue growth may remain relatively less affected because companies could partially pass on higher costs, only eight sectors accounting for around 10% of rated corporate debt are expected to witness a material impact on credit quality. Controlled gearing levels and sustained domestic demand would continue supporting corporate credit profiles, he said.
According to the report, India Inc’s balance sheets have strengthened substantially over the past decade. Median corporate gearing has halved to around 0.5 times as of March 2026, while interest coverage ratios have doubled to more than five times. This has created sufficient financial headroom for companies to absorb profitability shocks arising from geopolitical disruptions.
CRISIL said policy support measures, including the recently announced emergency credit line guarantee scheme (ECLGS) 5.0, would also help cushion smaller businesses and micro, small and medium enterprises (MSMEs), which remain more vulnerable due to weaker balance-sheet buffers.
Among sectors under stress, the ceramic industry is expected to face the most severe impact. CRISIL said supply-side disruptions caused by gas shortages in certain areas could reduce ceramic sector revenues by nearly one-third and cut profitability by half.
The airline sector is also expected to witness a sharp deterioration due to airspace closures, higher aviation turbine fuel prices and rupee depreciation. Profitability in the sector could decline by around 50%, the report said.
Other crude-linked sectors expected to face moderately negative impacts include polyester textiles, speciality chemicals and flexible packaging manufacturers, which may only be able to partially pass on rising raw material costs and that too with a lag.
Auto component manufacturers are likely to struggle with the delayed pass-through of higher input and freight costs, particularly in the aftermarket segment. Diamond polishers may see procurement costs rise because of sourcing through alternative hubs, while basmati rice exporters could face lower demand from key international markets.
At the same time, some export-oriented industries could benefit from rupee depreciation. CRISIL said sectors such as pharmaceuticals, textiles, readymade garments, shrimp processing and electronics manufacturing may gain from improved export competitiveness.
The report noted that most Indian companies have either natural hedges through trade exposure or forward cover against foreign exchange risks. Additionally, the share of foreign currency borrowings in India Inc’s total debt remains low and largely hedged.
According to Somasekhar Vemuri, senior director of CRISIL Ratings, the overall outlook for India Inc’s credit quality remains 'stable but cautious' given the uncertain trajectory of the West Asia conflict.
“If the strife and the stabilisation period are prolonged further, supply hiccups would exacerbate inflation and amplify demand disruption,” Mr Vemuri said.
He added that the key monitorables would remain the magnitude of the conflict and the extent and duration of elevated fuel prices, as these factors could significantly influence CRISIL’s future assessment of corporate credit quality.
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