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With the slight turnaround in the economy, the credit quality of corporate debt is also showing signs of recovery, rating agencies CRISIL and CARE said.
While this is a good sign at the start of the third quarter, further improvement in credit quality is expected to be gradual and any significant recovery will be subject to a sustainable increase in investment demand, CRISIL, a subsidiary of Standard & Poor’s, said in a statement.
Indian economy grew 5.7 per cent in the quarter ended June 2014. It expanded 4.7 per cent in FY14, compared to 4.5 per cent in the previous financial year.
According to CRISIL, recovery signs are reflected in credit ratio. The ratio of number of upgrades to number of downgrades was 1.64 times for April-September 2014 with 741 upgrades and 451 downgrades. Companies with low debt exposure primarily witnessed positive trends (upgrades) in credit quality.
The upgrades were visible for export-linked sectors and non-discretionary consumer segments such as traders, packaged foods, pharmaceuticals, textiles and agricultural products. These segments continue to have the highest upgrade rates.
In contrast, weak liquidity, and pressure on profitability were key drivers for downgrades. Firms with high leverage (ratio of debt to earnings before interest, depreciation and amortisation) was four times, These units are subject to significant credit quality pressures as evident from their credit ratio below one during first half of 2014-15.
Players operating in the construction, engineering and capital goods, and automobile (auto) ancillary sectors had higher downgrade rates than their counterparts in other sectors. CARE Ratings said its modified credit ratio (MCR), the ratio of (upgrades plus reaffirmations to downgrades plus reaffirmations – was increasing. MCR registered a significant improvement in the second quarter. The ratio at 1.25, in the second quarter of FY15 came in at a three-year high. MCR reflects the continued improvement in the credit quality of the rated entities.
The MCR has been on the path of steady progress for the past five quarters. The trend of upgrades outnumbering downgrades has been in vogue since Q2 of FY14.
Also, a higher number of entities have had their ratings being reaffirmed.
In Q2 of FY15, ratings for 170 entities were upgraded (80 in Q2 of FY14), 61 entities had their ratings downgraded (61 in Q2 of FY14) and 372 entities saw reaffirmation (326 Q2FY14).
Pawan Agrawal, senior director at CRISIL Ratings, said credit quality buoyancy in the overall economy is still some time away. For that to happen, investment demand, which depends on the extent to which the central government pushes big ticket policy reforms, needs to substantially increase.
A gradual improvement in the credit ratio is expected over the medium term, as economic growth records mild recovery from the lows of the two years through March 31, 2014, it added.
