Credit quality of mid-size firms improves: Crisil

Mid-size firms, with operating income of ₹100-500 crore, showed significant improvement in credit quality, according to ratings agency Crisil. Their credit ratio, or the ratio of upgrades to downgrades, was at 2.26 for the second half of FY2015.

The ratio was at 1.55 for small firms (with operating income below ₹100 crore) and at 2 for large firms (with operating income over ₹500 crore). Corporate India will continue to be weighed down by debt in the coming fiscal and recovery will be slow, the ratings agency said.

Overall, India Inc’s credit quality continued its slow recovery in 2014-15, with the credit ratio at 1.75, up marginally from 1.64 in the first half. (When upgrades are more than downgrades, the credit ratio will be greater than 1.)

However, Crisil believes a pervasive improvement in credit quality remains elusive because the value of debt seeing downgrades is far more than those seeing upgrades.

This is reflected in the ratio of debt of firms upgraded to that of firms downgraded at 0.72 times. Through FY15, total debt downgraded was worth ₹2 lakh crore while only debt worth ₹1.4 lakh crore was upgraded.

This proportion is even weaker for large-sized firms, at 0.45 times.

The biggest impact is borne by companies in the infrastructure or related space (steel, cement), and in a vicious cycle, the heavy burden of debt will continue to constrain the ability of large firms to improve their credit profiles, Crisil said. A large proportion of this debt has been contracted for projects that haven’t been completed yet, or are facing demand slack after completion.

The healthy performance of mid-sized firms, especially those in textiles, agriculture, auto and auto ancillaries, can be attributed to more efficient working capital management which stems from greater bargaining power, when compared to small firms. On the other hand, highly leveraged large firms were paralysed by the large quantum of debt on their balance sheets.

Crisil’s ratings portfolio covers about 35-40 per cent of the banking system’s credit to the corporate sector. Consequently, the agency expects that the pressure on asset quality and profitability of Indian banks will persist well into 2015-16.

The agency doesn’t expect companies to undertake more capital expansion in such a scenario.

Somasekhar Vemuri, Senior Director, said: “Most companies have either completed capex or are looking at backward integration, with any capex required being funded by internal accruals. The private sector is now a lot more cautious about committing itself to investing more. It is waiting for clarity on whether demand will recover and for existing capacity to be fully utilised.”

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