Crisil Ratings’ credit ratio¹ (upgrades to downgrades) increased to 5.04 times in the second half (H2) of fiscal 2022, compared with 2.96 times in the first half (H1), underscoring continuing improvement in the performance of India Inc.

In all, there were 569 upgrades and 113 downgrades in H2.

The upgrade rate increased to 15.4% in H2 from 12.5% in H1, while the downgrade rate declined to 3.1% from 4.2% in the same period². The downgrade rate is less than half the ~6.5% average seen in the past ten half-year periods.

The performance comes on the back of a sustained improvement in demand (that lifted the revenues of most sectors to their pre-pandemic levels), secular deleveraging by debt issuers (seen over the past few fiscals and through the pandemic), and proactive relief measures by the government (that cushioned the pandemic blow).

Crisil Ratings’ outlook on credit quality remains ‘positive’, with upgrades expected to outnumber downgrades in fiscal 2023, too. However, going forward, the credit ratio could moderate for two reasons: one, demand and profitability could soften if commodity prices remain high; and two, winding back of Covid-19 relief measures. Further, with offices reopening and business travel restarting, some of the cost savings of 2020-22 would be eliminated.

Says Subodh Rai, President and Chief Ratings Officer, Crisil Ratings, “Demand recovery, nimbleness in managing supply chains, and a tight leash on costs have shored up the median operating profit growth of the upgraded companies by ~41% in the past two fiscals — more than double the rate for the portfolio. The rated companies have continued to deleverage, as underscored by the median gearing, which is estimated to have declined to ~0.55 time as of end-fiscal 2022, compared with nearly 1 time five years back.”

Crisil Ratings conducted a study based on its ‘Corporate Credit Health Framework’, which analyses the credit quality outlook of the top 40 sectors (by revenue), accounting for over 70% of its rated debt (excluding the financial sector). This framework looks at the strength of balance sheet, improvement in operating cash flows in fiscal 2023 over fiscal 2022, and vulnerability to the Russia-Ukraine conflict.

The key takeaways from the study:

• 15 sectors (~16% of rated debt) are in the ‘most buoyant’ bucket with favourable operating cash flows and robust balance sheets. These include pharmaceuticals, healthcare, IT, specialty chemicals, auto components, and electric components
• The remaining 25 sectors are expected to see a favourable trend in only one of the two parameters — operating cash flows or balance sheet — and have a positive to neutral credit quality outlook, though the buoyancy may be tempered. Some of these sectors, including FMCG³, edible oils, and power, benefit from being essential goods and services. Among others, sectors such as textiles benefit from higher demand for exports, while construction, and pipe and pipe fittings benefit from government spending on infrastructure.
• Interestingly, no sector studied seems to be facing an unfavourable trend in terms of operating cash flow and balance sheet strength in fiscal 2023

Meanwhile, the ongoing Russia-Ukraine conflict and the consequent surge in commodity prices can turn sectors such as diamond polishers, agrochemicals and ceramics vulnerable if supply-side challenges continue for long. Oil and gas marketing companies may see their operating profit decline due to delays in retail fuel price increases, but their credit profiles will continue to benefit from government support.

Financial sector companies are expected to have a ‘stable’ credit quality outlook, with credit growth at both, banks and non-banks trending upwards to 11-12% and 8-10%, respectively, in fiscal 2023.

For banks, credit growth will be largely driven by the corporate segment — the pace of growth could even double — driven by capex in infrastructure and pockets of the manufacturing sector, and incremental working capital demand. Retail credit is also expected to grow at a healthy clip for both, banks and non-banks, supported by continued underlying demand. For non-banks, the home, gold, vehicle and unsecured loan segments are likely to see higher growth.

Overall, asset quality is likely to improve for both banks and non-banks as the uptick in economic activity would support the cash flows of borrowers. Banks will also benefit from a reduction in corporate non-performing assets (NPAs), while non-banks will get a respite owing to the deferral of the stringent NPA recognition norms by the Reserve Bank of India. However, the performance of the micro, small and medium enterprises (MSME)⁴, the unsecured loan segments, and the restructured portfolios bears watching at both banks and non-banks.

Says Somasekhar Vemuri, Senior Director, Crisil Ratings, “Our credit quality outlook for India Inc remains ‘positive’ even as we expect some moderation in the credit ratio. Persistent inflationary trends can affect both, consumption demand and profitability of firms, which can temper corporate credit quality. Any new Covid-19 variant that dilutes the benefit of vaccination also remains a risk to our credit quality outlook. Nevertheless, deleveraged balance sheets structurally position India Inc well to navigate these uncertain times.”

¹ Excludes rating actions involving ratings with the Issuer Not Cooperating (INC) suffix
² Upgrade or downgrade rate refers to the ratio of upgrades or downgrades respectively during the period to total outstanding portfolio at the beginning of the period on an annualized basis
³ Fast moving consumer goods
⁴ Micro Small and Medium Enterprises