India Inc's credit quality remains healthy in H2FY24: Rating agencies

While commodity prices have softened, revenue of upgraded companies in the CRISIL rating pool grew by about 13 per cent in fiscal 2024 largely led by a pick-up in volume

Gaining from conducive macro-economic conditions, the credit quality of Indian companies remained strong between October 2023 and March 2024 (H2 FY24). This was on the back of deleveraged balance sheets, sustained domestic demand and government-led capital expenditure.

Rating upgrades continued to surpass rating downgrades in H2 FY24, according to CRISIL, ICRA and India Ratings. CRISIL said there were 409 upgrades and 228 downgrades in H2.

The credit ratio, rating upgrades to downgrades, moderated to 1.79 times in the second half of financial year 2023-24 (H2 FY24) compared with 1.91 times for April-September 2023 (H1), according to CRISIL.

All the three rating agencies were optimistic about the credit quality of companies in the financial year starting April 2024 (FY25).

 

The credit quality outlook remains positive with upgrades seen continuing to outpace downgrades. It is driven by domestic demand, low corporate debt levels and tailwinds from the ongoing infrastructure build-out.

 

Dwelling on factors that impacted credit quality, K Ravichandran, chief rating officer, ICRA, said a large majority of rating upgrades in H2 were driven by company-specific factors. These were expansion in market share or order book, improvement in the cost structure and reduction in project risk.

Aviation, hospitality, auto & auto components, and banks were the only few sectors in FY24 where rating upgrades were induced mostly by industry tailwinds.

While commodity prices have softened, revenue of upgraded companies in the CRISIL rating pool grew by about 13 per cent in FY24, largely led by a pick-up in volume.

With balance sheets in most sectors at their healthiest, capacity utilisation around peak levels and expected interest rate cuts, a broad-based pick-up in private capex is finally in sight, said Gurpreet Chhatwal, managing director (MD), CRISIL Ratings.

Arvind Rao, senior director, India Ratings, said soft commodity prices during FY24 supported the rated entities’ cash flows, despite the initial concerns on elevated cost of debt and high inflation. Geopolitical issues, be it ongoing wars or weak global economic conditions, have had limited impact on the credit profiles till now.

The trend of steady credit improvement is expected to continue in the new financial year (FY25). Around 21 of 26 corporate sectors tracked by CRISIL have strong-to-favourable credit quality outlook. This is marked by robust balance sheets and healthy operating cash flows — expected to be as much, or higher, than in FY24.

However, there could be rough times for some sectors. CRISIL felt four corporate sectors — specialty chemicals, agrochemicals, textile cotton spinning and diamond polishers —are facing headwinds. Their fortunes may be aligned with global macroeconomic conditions, which are subdued at present.

The sectors where industry headwinds played spoilsport in FY24 and may continue to do so in the near term include chemicals, cut & polished diamonds, and bulk tea, according to ICRA. The key downside factors that could throw a spanner in the works to radiant prognosis for FY25 would be how the monsoons pan out this year along with the geopolitical landscape, ICRA said.