Rising input costs, higher commodity prices and rising interest rates are likely to put pressure on the profitability and credit quality of Indian companies in 2011-12, said credit rating agency Crisil.
The impact on profitability, according to the agency, has been visible from the second quarter of 2010-11 onwards.
“The ability of companies to pass on higher input costs to consumers will be limited due to rising competition. Higher interest rates will also add to the cost element. So far, robust demand has supported credit quality of companies. But going ahead, higher interest rates, could lead to moderation of both investment demand and consumption demand. This could impact the credit quality of Indian companies,'' said Mr Pawan Agrawal, Director, Crisil Ratings.
This could lead to a fall in the relative ratio of upgrades to downgrades, which is measured as modified credit ratio (MCR, an indicator of the relative frequency of upgrades and downgrades).
Companies which are usually more leveraged or which have longer working capital cycles are likely to see downgrades as their credit quality could be impacted, Mr Agrawal said.
Industries like cement, chemicals, construction, automobile and textile may be affected by high input prices.
In fiscal 2010-11, Crisil upgraded 605 ratings and downgraded 269 ratings on a base of around 6200 ratings as on March 31, 2011.
As the upgrades outnumbered downgrades, the MCR improved to 1.10 times in 2010-11 from 0.93 times in 2009-10.
The MCR has been on an upward trajectory for the second year, after plummeting to a decade low of 0.86 times in 2008-09. However, given the increased pressure on profitability, any further improvement in MCR in 2011-12 may be limited, the report said.
In the just-ended fiscal most upgrades were from sectors like auto and auto components, steel, pharma and banking. While the downgrades in sectors like textile, construction, MFI, industrial machinery.
Crisil has also moderated the GDP projection for 2011-12 to 8.3 per cent, from 8.6 per cent for 2011-11, due to the slowing of investment and consumption demand.