Credit quality pressures bottoming out: CRISIL

But improvement will be gradual due to fragile economic recovery

April 02, 2014 3:57 IST | India Infoline News Service
Corporate India’s credit quality is on course for recovery, albeit gradually, in 2014-15 (refers to financial year, April 1 to March 31). CRISIL believes the credit ratio – the ratio of rating upgrades to downgrades – may recover from the low levels seen last fiscal as pressure on profitability and demand eases. Nevertheless, the overall credit quality will be far from buoyant in the near term, given the fragile economic growth and limited scope for reduction in interest rates.
The credit ratio, at 0.79 times in 2013-14, has remained weak for two years now as downgrades outnumbered upgrades on slowing demand, tight liquidity and high interest rates. However, moderation in downgrade intensity—to 10.1 per cent from 12.1 per cent in 2012-13—has helped the credit ratio recover marginally from 0.62 times in the previous fiscal. These rating actions were witnessed on a very large base of over 13,000 ratings, making them quite representative of the trends in corporate credit quality in India.
CRISIL downgraded ratings of 1,165 firms and upgraded those of 921 in the last fiscal. Around 90 percent of the downgrades was on account of slowing demand, tight liquidity, and stretched working capital cycles. Companies in investment-linked sectors such as power, construction, engineering and capital goods, and transport had more downgrades than firms in other sectors.
More than a third of the upgrades was on account of company-specific factors such as sustained track record of timely debt servicing and stronger-than-expected capital structure. Another third of upgrades was driven by improved business conditions for firms in sectors—such as packaged foods, textiles and agricultural products—that have linkages with exports, agriculture, and non-discretionary consumer segments.
Says Ramraj Pai, President - Ratings, CRISIL: “Our analysis indicates that firms with better profitability and low leverage have survived the downturn in economy well.” Firms with a return on capital employed (RoCE) of more than 15 per cent saw 58 per cent more upgrades than downgrades. Similarly, upgrades outnumbered downgrades by 30 per cent for firms with low leverage — those with a ratio of debt to earnings before interest, tax, depreciation and amortisation (debt/ EBIDTA) of less than 3 times.
CRISIL believes that corporate credit quality will improve as GDP growth touches 6 per cent in 2014-15 from sub-5 per cent levels seen in the last two fiscals. The credit ratio will, however, remain below 1 time in the near term.
Says Pawan Agrawal, Senior Director - Ratings, CRISIL: “Significant improvement in credit ratio is possible only if there is strong and sustainable recovery in investment as well as in consumption demand. The underlying assumptions for any improvement in credit quality are progressive policies and continuity in reforms.” The degree of economic recovery, availability of liquidity, performance of monsoon, continued recovery in export markets, the outcome of the forthcoming general elections, and success in deleveraging the balance sheets through sale of assets will all be critical for India’s corporates.

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