Upgrades higher than downgrades but concerns remain
Crisil said it had upgraded 817 firms and downgraded 434 firms in the first half of fiscal 2018.
Crisil said it had upgraded 817 firms and downgraded 434 firms in the first half of fiscal 2018 for a credit ratio of 1.88 times compared to 1.22 times in the fiscal ended March 2017. ICRA upgraded 304 entities and downgraded 261 entities in the same period for a credit ratio of 1.2 times similar to fiscal 2017.
Credit ratio is the ratio of upgrades to downgrades with a reading above 1 indicating upgrades outnumbering downgrades. Crisil said that for the first time in five years, the credit ratio and debt weighted credit ratio were above 1 on a rolling 12 months basis.
Assessing the two ratios on a longer timeframe such as a 12 months rolling basis obviates period bias and indicates the trend could become structural in nature. “The credit ratio stood at 1.59 times and the debt-weighted credit ratio at 1.94 times. This indicates that the trend of recovery in credit quality has sustained for a year now,” said Pawan Agrawal, chief analytical officer, Crisil Ratings.
A 12 months rolling basis obviates period bias and indicates the trend could become structural in nature. “The improvement has come about primarily because of better financial indicators as corporates kept away from capital expenditure given substantial headroom in capacity utilisation – in many sectors. We expect this trend to continue till demand firms up. Lower interest costs will provide further support,” said Agrawal.
However, ICRA said that though upgrades remained higher, the volume of the debt downgraded increased significantly compared with the previous year and remained elevated while the average volume of debt downgraded per entity also increased.
“At Rs 2.9 lakh crore, the volume of the debt downgraded by ICRA in the just concluded half-fiscal was over 70% higher than that downgraded during the previous full fiscal. Of the total debt downgraded, almost 50% pertained to entities belonging to the banking and the financial sector. Even for entities in the non-financial sector, the aggregate volume of the debt downgraded in H1 FY2018 was over 30% higher than that downgraded during the full year of FY2017,” said Anjan Ghosh, chief rating officer, ICRA adding that credit quality pressures have become more broad based.
Metals, power and telecom were among the largest contributors to the volume of downgrades for ICRA. While the debt-weighted credit ratio for ICRA rated companies fell to 1 time in from 1.7 times in FY2017, indicative of the continuing pressures on credit profiles.
Crisil said that the trend was positive but not buoyant. It expects corporate credit quality to continue recovering, driven by improvement in balance sheets and helped by lower rates, stable working capital cycles, firm commodity prices and improving domestic consumption demand.
“Small and mid-sized firms could also see cash flow pressures as they adjust to the new GST regime. And some investment-linked sectors such as real estate and capital goods would continue to face headwinds,” Crisil said.