Rating agency Crisil Ratings on April 1 said its outlook on credit quality remains positive, with upgrades expected to outnumber downgrades even in fiscal 2023.
However, going forward, the credit ratio could moderate for two reasons: one, demand and profitability could soften if commodity prices remain high; and two, winding back of Covid-19 relief measures. Further, with offices reopening and business travel restarting, some of the cost savings of 2020-22 would be eliminated, Crisil said.
“Our credit quality outlook for India Inc remains ‘positive’ even as we expect some moderation in the credit ratio. Persistent inflationary trends can affect both, consumption demand and profitability of firms, which can temper corporate credit quality. Any new Covid-19 variant that dilutes the benefit of vaccination also remains a risk to our credit quality outlook. Nevertheless, deleveraged balance sheets structurally position India Inc. well to navigate these uncertain times,” said Somasekhar Vemuri, Senior Director, Crisil Ratings.
Crisil Ratings’ credit ratio (upgrades to downgrades) increased to 5.04 times in the second half (H2) of fiscal 2022, compared with 2.96 times in the first half (H1), which indicates continuing improvement in the performance of India Inc. Overall, as per Crisil, there were 569 upgrades and 113 downgrades in H2.
"The upgrade rate increased to 15.4 percent in H2 from 12.5 percent in H1, while the downgrade rate declined to 3.1 percent from 4.2 percent in the same period," Crisil said.
The downgrade rate is less than half the nearly 6.5 percent average seen in the past ten half-year periods. The performance comes on the back of a sustained improvement in demand (that lifted the revenues of most sectors to their pre-pandemic levels), secular deleveraging by debt issuers (seen over the past few fiscals and through the pandemic), and proactive relief measures by the government (that cushioned the pandemic blow)," Crisil added.
Subodh Rai, President and Chief Ratings Officer, Crisil Ratings, underscored that demand recovery, nimbleness in managing supply chains, and a tight leash on costs have shored up the median operating profit growth of the upgraded companies by nearly 41 percent in the past two fiscals — more than double the rate for the portfolio.
The rated companies have continued to deleverage, as underscored by the median gearing, which is estimated to have declined to nearly 0.55 times as of end-fiscal 2022, compared with nearly one time five years back, said Rai.
Crisil said it conducted a study based on its ‘Corporate Credit Health Framework’, which analyses the credit quality outlook of the top 40 sectors (by revenue), accounting for over 70 percent of its rated debt (excluding the financial sector). This framework looks at the strength of the balance sheet, improvement in operating cash flows in fiscal 2023 over fiscal 2022, and vulnerability to the Russia-Ukraine conflict.
Crisil found that 15 sectors (nearly 16 percent of rated debt) are in the ‘most buoyant’ bucket with favourable operating cash flows and robust balance sheets. These include pharmaceuticals, healthcare, IT, specialty chemicals, auto components, and electric components.
Moreover, the remaining 25 sectors are expected to see a favourable trend in only one of the two parameters — operating cash flows or balance sheet — and have a positive to neutral credit quality outlook, though the buoyancy may be tempered. Some of these sectors, including FMCG, edible oils, and power, benefit from being essential goods and services, Crisil said.
Among others, sectors such as textiles benefit from higher demand for exports, while construction, and pipe and pipe fittings benefit from government spending on infrastructure. Interestingly, no sector studied seems to be facing an unfavourable trend in terms of operating cash flow and balance sheet strength in fiscal 2023, Crisil added.
The rating agency pointed out that the ongoing Russia-Ukraine conflict and the consequent surge in commodity prices can turn sectors such as diamond polishers, agrochemicals and ceramics vulnerable if supply-side challenges continue for long. Oil and gas marketing companies may see their operating profit decline due to delays in retail fuel price increases, but their credit profiles will continue to benefit from government support.
Financial sector companies are expected to have a ‘stable’ credit quality outlook, with credit growth at both, banks and non-banks trending upwards to 11-12 percent and 8-10 percent, respectively, in fiscal 2023, Crisil said.
Overall, asset quality is likely to improve for both banks and non-banks as the uptick in economic activity would support the cash flows of borrowers. Banks will also benefit from a reduction in corporate non-performing assets (NPAs), while non-banks will get a respite owing to the deferral of the stringent NPA recognition norms by the Reserve Bank of India. However, the performance of the micro, small and medium enterprises (MSME), the unsecured loan segments, and the restructured portfolios bears watching at both banks and non-banks, Crisil said.