Number of companies with 'default' debt rating doubles to 148

Failure in earnings recovery and deteriorating asset quality of companies, particularly in the manufacturing sector, has resulted in nearly doubling of the number of listed companies whose debt has been assigned a “default” rating by credit rating agencies. 

According to data compiled — based on rating actions of the country’s top four agencies — around 148 companies were assigned a “default” rating in 2016, compared to 76 in 2015. A hundred companies were downgraded this year; of this, 41 were given a “default” rating.

Even the credit ratio — upgrade per downgrade — slipped from 76% last year to just 37% this year.

Some of the known companies which earned “default” tag during the year include prominent names such as Jindal Steel, Rolta India, Jaiprakash Associates, Lanco Infratech and Gammon India.

The meltdown in commodity prices during the start of the year weighed on the financial health of companies operating in the metals space. 

High indebtedness and low capacity utilisation continue to impact earnings in the sector, said analysts.

Further, 2016 also saw debt of several infrastructure and related companies slip to “default” rating.

“Certain sectors were showing signs of revival. However, demonetisation has postponed the turnaround by at least two quarters. Although we might see some bright spots in the coming days, the corporate health would largely remain unchanged,” said Madan Sabnavis, chief economist, CARE Ratings.

During the year, rating agencies upgraded the papers of 150 companies against 363. which were downgraded, resulting in a poor credit ratio of just 0.37. A reading of more than one indicates a revival in the economy, as it means more the numbers of corporate papers are being upgraded than the number being downgraded. 

Economists said a reading of less than 0.5 indicates the revival is at least three quarters away.

Debt of some of the well-known corporate entities, including Tata Steel, Jindal Steel, Inox Wind and Muthoot Fincorp, were downgraded during the year.

The list of downgrades includes some of the headline public sector undertakings (PSU) such as BHEL. Four PSU banks — UCO Bank, Allahabad Bank, Bank of India and Bank of Maharashtra — were downgraded during the year. 

Experts said these downgrades were largely on account of the asset quality review (AQR) that the Reserve Bank of India (RBI) conducted earlier in the year. 

The central bank had launched the AQR in a bid to clean up the balance sheets of banks. Due to the exercise, the earnings of various banks, especially the PSUs, witnessed slowdown. The provisions of these banks had also increased significantly.

Going forward, market participants expect sectors such as banking, financial services, real estate and metals to witness a slowdown.

“Corporate recovery remains elusive, given weakening profitability of stressed companies,” said brokerage Credit Suisse in a note to investors.