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The Indian economy continues to show signs of recovery and this was reflecting in the credit quality of companies.
Rating agency CRISIL had said last month India Inc’s credit quality continued its slow recovery in 2014-15, with the credit ratio coming in at 1.75 in the second half of the year — up marginally from 1.64 in the first half. When upgrades are more than downgrades, the credit ratio will be greater than one.
There were 466 downgrades in the second half, of which almost 60 per cent were attributable to weak liquidity. Upgrades totalled 816 with almost two-thirds driven by business-related factors such as scaling-up of operations, better demand outlook and improved capacity utilisation.
“Due to more number of rating upgrades, there is a wider pool of companies available to us for investments,” said R Sivakumar, head of fixed income at Axis Mutual Funds. “I believe the trend of upgrades may continue. In fact, in the last two years, there have been a large number of new companies accessing the bond and commercial paper market which is giving an opportunity to us to diversify the portfolio.”
According to ICRA Ratings, the number and severity of rating downgrades moderated during 2014-15, continuing with the trend that started in 2013-14. The number of rating upgrades increased substantially in 2014-15, with the overall proportion of upgrades in relation to opening issuers moving up to the levels of 2010-11. However, few fund managers believe that more than credit rating, the future performance outlook matters when it comes to investments.
Amit Tripathi, chief investment officer (fixed income) at Reliance Mutual Fund, said: “More than credit ratings, when we analyse companies, we forecast their future performance through the economic cycle and then make investments. Though upgrades have been happening, but it has not only been due to growth in profits and business for many companies. It is happening because of their abilities to deal with the down-cycle much better. It is also due to their future prospects for growth and balance sheet flexibility.”
The International Monetary Fund has projected the Indian economy to grow at 7.5 per cent in 2015-16, more than China’s, owing to a rise in disposable income and a pick-up in investment due to recent policy reforms. The World Bank had earlier said India’s economic growth could touch eight per cent in 2017-18 from 7.5 per cent in 2015-16, owing to an estimated investment growth of 12 per cent during FY16-FY18.
The number of rating upgrades could go up this financial year, too, especially with growth showing signs of keeping up its northward trajectory. Finance Minister Arun Jaitley said on Friday initiatives were being taken by the government to boost investments and introduce tax reforms, which will lead to 9-10 per cent economic growth in the coming years.
