Sectors with export focus account for a majority of downgrades.
Even as the economy seems to be on a recovery path, credit profile downgrades of companies are already at a record high, even higher than the total number of downgrades during the last financial year.
In the first half of the current financial year, Icra downgraded 84 issuers, against 56 for the entire financial year 2008-09. However, while there were no upgrades last year, the first half of the current financial year saw 28 upgrades.
In the first half of the current financial year, Icra downgraded 84 issuers against 56 last financial year.
While domestic market-driven sectors such as infrastructure, metals and mining saw upgrades, export-driven sectors such as gems & jewellery, textiles, apart from sectors such as steel and commercial real estate accounted for a majority of downgrades by Icra. The downgrades were equally distributed over the first and second quarters of the current financial year with the first quarter accounting for 48 per cent of the total downgrades recorded in the first half. Almost, 71 per cent of the upgrades happened in the second quarter.
Another credit rating agency, Crisil, recorded 130 downgrades and 23 upgraded in the first half, against 84 downgrades and 2 upgrades in the previous financial year.
The number of companies downgraded by rating agency CARE went up to 59 in the first half as against 12 in the first half of the previous financial year, and about 47 for the full previous year. “Textiles and the gems & jewellery sectors, being mainly export-oriented, faced a severe demand contraction from developed markets. The metals & mining sector, including steel, was affected by high inventory losses and declining product prices. Further, there were a few companies which booked heavy losses in their derivatives contracts, resulting in a deterioration of their credit quality,” said Rajesh Mokashi, deputy managing director, CARE Ratings.
Out of the 59 entities that were downgraded by CARE, 10 were from the gems & jewellery sector, nine from steel, 5 from textiles, 4 from financial services and 4 from auto and auto ancillaries. “Rating actions in the past six months have been on a much higher base of outstanding ratings, which is one of the key reasons for higher downgrades. Crisil had ratings outstanding on around 2,700 entities as on September 30, 2009, as against 400 as on March 31, 2008,” said Ajay Dwivedi, director, Crisil Ratings.
An Icra report points out that the key reasons for high downgrades in the first half of the current financial year were demand slowdown, pressure on profitability, slowdown in business and tight liquidity among others.
“With the operating environment showing signs of improvement and the raising of funds turning easier, both in debt and equity markets, the pressure on the credit profiles of Icra-rated entities appear to be easing. However, the extent to which this recovery sustains would hinge on the continuance of the currently easy liquidity situation, interest rates, and commodity prices among other factors. Further, slower demand in the export-oriented sectors and volatility in exchange rates could keep the profitability of some corporate entities under pressure,” points out the Icra report.
While, companies have easier access to funds as a result of the government’s fiscal and monetary policy easing and positive stock market conditions and lower commodity prices, a recovery in credit quality will, at best, be gradual, and may not necessarily be smooth, according to Crisil.
“There are indications that both the monetary and fiscal easing and the reduction in commodity prices are temporary. Additionally, Crisil does not expect a sudden and sustained upturn in economic conditions to lift corporate performance, unlike in the late 1990s,” according to the Crisil study. The study further adds, “Fiscal and monetary authorities have begun exploring the possibility of an exit from their present supportive stance. The timing and extent of these measures are likely to have a significant bearing on the pace and extent of economic recovery after the current phase of stabilisation.”
Rakesh Valecha, senior director, Fitch Ratings, said, “While a double-dip recession cannot be ruled out, Fitch currently assumes a protracted period of anaemic growth through to 2011. As far as Indian corporates are concerned, we are seeing a declining trend in downgrades, however, since the fiscal and monetary stimulus are driving a large proportion of this, an exit strategy and its replacement by private demand would be key drivers in sustaining this trend.”
