Tough times ahead for India Inc, says Crisil

Crisil cited a drop in its modified credit ratio this year, which follows three years of increase, as an indicator of the challenges that corporates would face. Modified credit is the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations.

Crisil, however, said corporate India's fundamentals continue to remain strong. It's modified credit ratio (MCR) has continued to remain above 1.0, implying strong credit fundamentals for Crisil-rated corporates.

In the first half of 2005-06, Crisil's annual MCR for long-term ratings steadied at 1.055, declining from the previous 1.16 in 2004-05.

The MCR reflects 6 upgrades and 1 downgrade in Crisil's long-term ratings portfolio. Upgrades continue to significantly outnumber downgrades and median financial ratios have stiffened across rating categories, indicating a broadbased improvement in debt protection through the investment-grade spectrum.

A tapering off in the overall MCR across all sectors signals a slowdown in the pace of improvement, and implies the start of a consolidation phase.

Another feature of the improvement in credit quality is that it has been observed primarily in the manufacturing sector. In fact, MCR for the manufacturing sector, though lower, is close to the an all-time high recorded in FY05.

Going forward, while the significant increases in oil prices, plateauing of growth rates in some key industries, infrastructure constraints, and hardness in real interest rates, are expected to pose challenges to the corporate sector, the stronger credit position of Crisil-rated corporates is expected to continue over the medium term.

Crisil said increase in real interest rates, sustained high price of oil, squeeze on profitability of commodity sectors due to increase in input prices unlikely to affect the rated companies in the short to medium term.

Strong GDP growth forecast for the year of 7 even if lower than 7.1 of last year is still high and unlikely to have a significant effect on the performance of the Indian corporate sector.