India Inc key credit ratio moderated sharply in second half of FY23: Crisil Ratings

India Inc's key credit ratios moderated sharply in the second half of FY23 on expected lines and are likely to go down further, Crisil Ratings said on Monday, maintaining that upgrades will continue to outpace downgrades.

The Crisil credit ratio, or the number of upgrades to downgrades, moderated to 2.19 times for the October 2022-March 2023 period, as against 5.52 times in the first half of FY23. There were 460 companies whose debt got upgraded, as against 210 which saw a downgrade.

Looked at from the outstanding debt perspective, the agency which rates 7,000 entities said the ratio moderated to 2.47 times, as against 7 times in the first half of the fiscal. The agency's managing director Gurpreet Chhatwal told reporters that it has a "positive bias" on the overall credit scenario quality for FY24, and the upgrades will continue to be higher than the downgrades even though there can be a further moderation in the ratios.

Going forward, the key risk factors to watch out for, which may have an impact on the credit ratings of local companies, will be the slowdown in global demand and monetary tightening in the global markets, Chhatwal said.

The agency said both the upgrade and downgrades activity was broad-based across sectors, pointing out that domestic demand led to upgrades in auto components and food products, while infrastructure companies were helped by the continued capex push from the government.

The upgrade rate declined to 13.46 per cent for the second half, but is significantly higher than the 10-year average of 10 per cent. The downgrade rate inched up to 6.14 per cent and has reverted back to the 10-year average with this increase.

"Volatile commodity prices have impacted profitability, particularly of micro, small and medium enterprises (MSMEs), while export-oriented sectors face headwinds from slowdown in their major markets," said Chhatwal.

The small business segment, which had benefitted from the favourable policy interventions to protect them over the last three years since the start of the pandemic, will have to grapple with paying off restructured loans, higher interest rates and higher input costs as commodity prices firm up, the agency said.

On the exports front, the agency said the upgrade rate for export-oriented sectors halved to 12.2 per cent in the second half of FY23 from 21.8 per cent in the first half.
The downgrade rate increased to 7 per cent from 3 per cent.

A senior official said the overall exports growth is expected to slow down to 2-4 per cent in FY24, from the 5-7 per cent estimated to have been witnessed in FY23. Corporate India continued with its deleveraging activity, and the agency expects the median gearing of its portfolio to correct to 0.45 times by end-FY24 end. The agency expects industrial and infrastructure capital expenditure to kickstart from the second half of the new fiscal.

The agency has placed 19 sectors, including hospitality and auto, accounting for over 41 per cent of the rated debt as buoyant ones, while the remaining 25 sectors will log favourable trends in one of the two parameters  'operating profits or leverage' and hence their credit quality outlook will vary from positive to stable, Crisil said.

Its smaller peer India Ratings said the number of downgrades in the second half were just 0.26 per cent of the upgrades, which is a further improvement from 0.31 per cent in FY22. It upgraded 295 issuers' ratings as against 78 downgrades.

Its senior director Arvind Rao attributed the upgrades to deleveraging, higher revenues and profitability and liquidity availability. Icra Ratings, another rating agency, said credit quality has persevered even though the operating environment had some headwinds, and added that there were three upgrades for every downgrade in its portfolio.

Careedge Ratings said its credit ratio, which measures the ratio of upgrades to downgrades, normalised to 2.72 in H2FY23 after reaching an all-time high of 3.74 in H1FY23. It upgraded the ratings of 383 entities and downgraded the ratings of 141 entities during the six months, as per an official statement.

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