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The clouds of downgrade are still hovering over India Inc but the rating action by two agencies—Crisil and Icra—suggests pressure on corporate credit quality may have somewhat ebbed in the first half of this fiscal. Crisil announced 434 downgrades in H1FY18 against 817 upgrades, while Icra downgraded 261 entities and upgraded 304.
Importantly, at 6%, Crisil’s downgrade rate for the first half of this fiscal is at a five-year low, while its 12% upgrade rate during this period is slightly above the average for the past 10 semi-annual periods. Its credit ratio (number of upgrades to downgrades) improved to 1.88 times in H1FY18, against 1.22 times for the entire FY17. A reading above 1 suggests upgrades exceed downgrades. The debt-weighted credit ratio also rose to 3.19 times, compared with 0.88 time for FY17.
Ratings by various agencies, including Crisil and Icra, over the past two years witnessed more markdown than improvement—3,371 downgrades against 2,212 upgrades in FY16, and 3,575 downgrades and 1,836 upgrades in FY17.
“The improvement has come about primarily because of better financial indicators as corporates kept away from capital expenditure given the output gap – or substantial headroom in capacity utilisation – in many sectors,” Crisil said on Tuesday. The agency forecast this trend to continue until demand picks up and added lower interest costs would provide further support.
Crisil’s ratings indicate while the country’s twin balance sheet problem — non-performing asset-encumbered banks and over-leveraged companies — continues to be a major concern, it may be slightly less critical now than last year.
Icra, however, seems to be more cautious in its approach. Its credit ratio was 1.2 times in H1FY18, similar to that witnessed during FY17. Although its upgrades outnumber downgrades in the first half, ICRA’s chief rating officer Anjan Ghosh said, at R2.9 lakh crore, the volume of the debt downgraded in H1 was more than 70% higher than that downgraded during the entire FY17.
Almost a half of the debt downgraded by Icra pertained to entities belonging to the banking and the financial sector. Even for non-financial entities, the volume of the debt downgraded in H1FY18 was over 30% higher than that downgraded during the entire last fiscal. Icra’s rating actions in the first half of this fiscal reflects three key features: the volume of the debt downgraded increased significantly against the previous year (by a factor of 2.7 times in H1FY1); the volume of the debt downgraded continued to be higher than the volume upgraded; and finally, the average volume of debt downgraded per entity increased.
However, Icra said while there are reasons to draw a sober inference from its downgrade rating actions in H1 FY18, several other data points partly placate this conception. “Firstly, there was no increase in the proportion of investment grade entities slipping into the non-investment grade. At the same time, H1 FY2018 wasn’t a period wherein Icra’s rating actions were any more severe than during FY2017. On balance, the median credit rating of Icra’s rated universe continues to be in the BB category, having remained so since FY2014,” it added.
As per Icra, ferrous metals, banking and finance and telecom were sectors where the number of downgrades was higher than upgrades in the first half of this fiscal. By contrast, renewable energy, textiles, sea-foods, petrochemicals and polymers showed improvement.
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