After witnessing a sharp rise in rating downgrades through 2011 and 2012 due to stressed balance sheets, the fortunes of Indian companies are likely to improve in the new year. Rating agencies, however, said the shift to upgrades would be gradual.
While not many upgrades might happen in the near-term, the encouraging sign is that the pace of downgrades declined in the third quarter of this financial year, Icra managing director and chief executive N Takkar said. That itself is an encouraging sign, considering that the previous five-six quarters saw a sharp rise in downgrades.
According to Pawan Agrawal, senior director at CRISIL Ratings: “The intensity of downgrades has slowed down and we are close to the end of the cycle.” Deep Mukherjee, director-corporate ratings at India Ratings agreed. “The worst was perhaps behind us,” he said.
The credit ratio has remained below one per cent for the last five quarters, highlighting pressures on credit quality of corporate India. But it is also true that there is a gradual moderation in the pace of credit ratio slippage.
The hope for an improvement in the climate for corporate rating is rooted in a number of factors including better-than-expected operating margins for companies in the third quarter (October-December).
An economic recovery in 2013-14 and easing of interest cost pressures when the Reserve Bank of India begins repo rate cuts could have a favourable impact on corporate balance sheets, according to CRISIL and India ratings. Icra echoes the view.
Takkar said there was an expectation that things would stablise. The turnaround in the equity market sentiments has improved the access to capital, he added.
The accommodative stance (read rate cut and liquidity) is also expected to provide comfort. According to CRISIL’s Agarwal, the margins are rising due to softening of commodity prices and cost controls. While this might bring some relief, it is not adequate for any material improvement in quality of balance sheets.
For repairing balance sheets, companies would need capital infusion which could be through routes including public market, private equity or venture capital and pumping of money by promoters, Agarwal said. Another factor that may work to the benefit of companies is better repayment discipline and ever increasing attention on rating records by lenders.
Icra said the universe of rating companies had expanded due to bank rating requirements and companies were now alert to the fact that rating action followed almost immediately even on slight delay in payments. Many of them have tightened their procedures and process to ensure timely payments.
