Credit quality of Indian companies improved in the first half of this financial year, with ratings agencies reported more upgrades than downgrades during the six-month period.

The infrastructure sector led corporate upgrades during the period, as per data reported by CARE Ratings, CRISIL and ICRA.

“Upgrades in H1 FY23 were mainly driven by a post-pandemic broad-based recovery across sectors, with manufacturing sector’s credit ratio at 4.59, leading the overall improvement in the credit ratio,” CARE Ratings said.

The sectors which witnessed the highest upgrades across the three agencies were healthcare, steel, chemicals, textiles, automobiles, pharmaceuticals and real estate in the manufacturing and services sector. Further, roads, construction and power companies led the upgrades in the infrastructure sector, whereas non-banking financial companies saw the most upgrades in the BFSI sector.

In addition, sectors such as hospitality, airport operators, industrials, and marine ports are expected to grow in the coming months, as they experience a turnaround after the dismal pandemic years.

“India Inc. has shown notable resilience in terms of maintaining and even strengthening its credit quality, against the backdrop of multiple exogenous factors in the form of geopolitical conflicts, supply chain disturbances, volatile energy prices, and the actions and reactions of monetary policy interventions across the world,” ICRA said.

Corporate credit quality

CRISIL attributed the improvement in credit quality to strengthening domestic demand, higher realisations leading to better cash flows, and continuation of debt-light balance sheets as capital expenditure remains low.

“The performance of upgraded companies improved significantly over the past three fiscals despite severe pandemic-related disruptions,” CRISIL said, adding that the median expected EBITDA growth at a three-year CAGR of 25 per cent for the upgraded companies is much better than the 12 per cent expected for the rest of the portfolio.

In comparison, the downgrade rate at 5 per cent remained muted versus the past five-year average of 12 per cent and the 10-year average of 9 per cent, ICRA said, attributing the lower downside credit risks to the rebound in businesses post the pandemic, limited capital expenditures, restrained fresh term borrowings, and organic reduction in the existing balance sheet debt.

“The reasons for downgrades were entity-specific, including delays faced in realising receivables, instances of inter-group transactions posing governance concerns, rising input costs with limited pricing power, besides the rise in project implementation risks for some,” it said.

Going ahead, export-oriented sectors such as textiles, pharmaceuticals, and information technology could see a moderation in cash flows vis-a-vis earlier expectations due to slowdown in demand from end-user markets. Moreover, agro-chemicals, dairy, education services could also see a moderation in performance due to elevated costs and inability to fully pass them on, ratings agencies said.

Infrastructure and manufacturing

The infrastructure sector saw the most improvement in credit quality led by pent-up domestic demand, and significant deleveraging across sectors which aided recovery for the manufacturing sector and enhanced pace of execution. 

Further, strong order inflows and operating cash flows, refinancing of projects at better financing terms, structured financing avenues like InvITs, completion of crucial project milestones and equity infusion, led to upgrades in the sector, rating agencies said.

Gurpreet Chhatwal, MD of CRISIL, said that around 35 per cent of all upgrades were from the infrastructure sector, including large realty players, driven also by the increasing share of central counter-parties in infrastructure projects which has led to more predictable payment cycles

“Infrastructure sector is in a unique position of largely being a domestic story and generally decoupled from the global headwinds,” he said.

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