India Inc’s credit quality on the mend, say raters

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Corporate India’s credit quality is on course for recovery, albeit gradually, in 2014-15. Rating agencies Crisil and Icra believe the credit ratio — the ratio of rating upgrades to downgrades — may recover from the low seen in the last financial year as pressure on profitability and demand has started to ease.

Both the agencies reported higher downgrades compared with upgrades in the last financial year, but say emerging signs of stability in the macroeconomic indicators and the likelihood of some improvement on the growth front suggest the new financial year would see a less challenging environment.

In a report issued on Wednesday, Icra said, “Several policy initiatives alleviate credit concerns. They include the efforts to revive stalled projects, tariff revisions by various state utilities, the proposal to renegotiate terms of tariff for certain power projects and rescheduling of premium payout for road projects.”

In a separate statement, Crisil Ratings said corporate credit quality would improve as GDP growth was likely to touch 6 per cent in 2014-15 from sub-5 per cent level seen in the last two financial years. However, the agency expects the credit ratio to remain below 1 in the near term.

Pawan Agrawal, senior director for ratings at Crisil, said 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 balance sheets through sale of assets will all be critical for India Inc,” he said.

Crisil downgraded ratings of 1,165 companies and upgraded those of 921 in the last financial year (2013-14). Around 90 per cent of the downgrades were on account of slowing demand, tight liquidity and stretched working capital cycles. More companies from the investment-linked sectors such as power, construction, engineering and capital goods and transport saw downgrades than those from other sectors.

More than one-third of the upgrades were on account of company-specific factors, such as sustained track record of timely debt servicing and stronger-than-expected capital structure.

Crisil said firms with better profitability and lower leverage have survived the downturn in the 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.

Icra downgraded 602 firms against 559 upgrades. The total downgrades have declined to 9.6 per cent compared with the peak downgrades of 20.3 per cent in 2011-12. Also, upgrades during the year increased to 9 per cent from 4.7 per cent in 2012-13.

Last year industries that showed relatively higher stress were hotels, power, sugar, metals and mining, engineering, transportation, real estate and construction, electronics and electrical, auto and auto ancillaries and gems and jewellery. These sectors accounted for 51 per cent of the total downgrades in 2013-14.

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