India Inc's credit ratio hits 5-year low of 0.97 in first half of FY18

Rating downgrades still outpace upgrades

India Inc’s credit health has further deteriorated in the current financial year (FY18), if rating action is to go by. The credit ratio — number of upgrades to downgrades of debt paper — is at a five-year low of 0.97. In the first six months of the current financial year, rating agencies have upgraded 189 debt papers and downgraded 195.

Debt worth nearly Rs 2.57 lakh has been downgraded in FY18, which is 1.5 times that of FY17’s, show data provided by the Securities and Exchange Board of India (Sebi). In value terms, FY18 is already the second worst year, after FY16.Experts say subdued earnings and disruptions such as demonetisation and the goods and services tax (GST) have hit the cash flows of India Inc. Earnings growth has largely been flat in the past three years. Companies have reported an average eight per cent growth in profits for the just-concluded September quarter. Analysts say revival in the earnings cycle is at least two quarters away.

Another reason behind the surge in downgrades is low capacity utilisation. Between 2010 and 2013, manufacturing companies spent heavily on capacity building, anticipating a surge in demand as the economy was expected to embark upon a high growth trajectory. However, a fall in global commodity prices with less than anticipated macroeconomic growth spoilt the plan.

“Capacity utilisation has not picked up and important sectors such as infrastructure and cement are not doing well. Even the scenario in telecom and allied sectors don’t look great after the disruption created by Reliance Jio. Introduction of GST has also hit the earnings of small and mid-level companies.  To summarise, demand and cash flows are looking good only in a handful of sectors,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Although the current downgrade cycle started in FY16, the sector-wise composition has changed significantly in two years. Initially, the cycle was led by metal and commodity-related companies, as the collapse in global commodity prices induced stress. Now, banks are in the forefront on downgrades. The sector has, in the past few years, been hit by a sharp increase in non-performing assets. Lenders have become cautious, leading to a fall in credit growth among public sector banks.

The current downgrade cycle is nearing a trough, analysts say. The impact of one-time disruptions such as GST and demonetisation is fading, and improving macroeconomic indicators could improve the credit health, they say. Rating agencies say low interest rates, stable operating cycles and improving domestic demand are expected to ease the stress on credit health.

“We expect growth to be consumption-led because of a near-normal monsoon, softer interest rates and inflation. Implementation of the Pay Commission recommendation by states, and remnants of pent-up demand that were postponed due to demonetisation could also be tailwinds,” said Pawan Agrawal, chief analytical officer, CRISIL.

Also, economic growth could improve in the next few quarters, as the government steps up spending. The current export numbers suggest a recovery in global demand, especially in developed markets.

Analysts remain bullish on the consumption and automobile sectors, as these are expected to register double-digit annual growth for the next two-three years. The key concern has been real estate, where analysts are expecting declining sales and large unsold inventory.