India’s corporate credit profile in FY23 has been one of its strongest performance in over a decade on the back of sustained deleveraging, continued revenue and profitability growth, availability of liquidity, domestic consumption, investments led by government capex, and transmission of commodity prices to end customers.

The rise in share of Indian corporates in overseas markets was led by strong demand from the US and some realignment from China due to supply chain diversification, which also aided growth, rating agencies said.

Improvements

ICRA Ratings said FY23 saw almost three upgrades for every downgrade, and there were only 22 defaults, lower than 42 in FY22 and 44 in FY21. Its credit ratio, the number of upgrades to downgrades, moderated to 2.8 from 3.0 in FY22.

India Ratings and Research’s corporate downgrade-to-upgrade (D-U) ratio improved to its lowest level at 0.26, compared with 0.31 in FY22. Downgrades, including defaults, were contained as even lower-rated corporates had access to funds from financial institutions and debt obligations were largely met from internal accruals, it said.

“Apart from the sheer upgrade momentum, what was impressive about the FY23 performance was that it immediately followed a year that also witnessed a similar robust performance, indicating a large part of the portfolio has been upgraded in these years,” Arvind Rao, Senior Director at India Ratings, said.

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Infrastructure asset operators led the positive momentum, with several upgrades in renewable power and road operators. Companies in textiles, auto components, metals and mining, construction, financials, real estate, warehousing, and office segments, as well as the hospitality sector, saw most of the upgrades.

On the other hand, some construction companies saw order execution getting delayed; building materials, food products, pharmaceuticals, and gas-based power plants were some areas that faced downgrades.

Demand issues

With economic growth in advanced economies expected to falter in FY24, export-oriented sectors like textiles, gems and jewellery, and IT services could face demand issues in the near-term.

At the beginning of FY24, 81 per cent of the rated entities have a stable outlook. Corporates with a positive directional indicator were higher at 11 per cent compared to 8 per cent for those with a negative directional indicator, India Ratings said, adding that it expects the pace of rating upgrades to be moderate in FY24.

Downside risk

“A key downside risk stems from the possibility of an unexpected rise in bad loans when the full impact of the rise in interest rates in FY23 starts reflecting in the P&L (profit and loss) of borrowers in FY24. A further rise in interest rates (beyond the 250-bps hike in repo rates in FY23) will test the resilience of the asset quality improvement trends,” ICRA said.

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