The corporate credit profile in the first half (H1 FY23) continued its strong rating upgrade momentum and has remained resilient to deteriorating macroeconomic conditions, according to India Ratings and Research (Ind-Ra).

Downgrades-Upgrades ratio dips

The rating agency upgraded the ratings of 1,591 issuers, while downgrading the ratings of only 40 issuers in H1 FY23.

“The upgrades have exceeded the downgrades for the past four half-year periods. The corporate downgrade to upgrade ratio (D-U ratio) was at one of its lowest at 0.25 (H1 FY22: 0.28; FY22: 0.31),”Ind-Ra analysts Arvind Rao and Saurav Singh said.

Defaults were also at one if its lowest levels of 0.8 per cent of the co-operative reviewed ratings in H1 FY23 (H1 FY21: 1.4 per cent; FY22: 1.9 per cent).

Ind-Ra noted that the rating upgrade intensity in H1 FY23 continued unabated, as issuers benefited from the gains accrued to their credit profile post the pandemic-induced lockdowns.

Growth drivers

The drivers of credit ratings in H1 FY23 are similar to that of FY22 -- that is healthy financial profile, improving business performance and availability of liquidity.

Despite the current macroeconomic maelstrom - high inflation, sharply rising interest cost, runaway commodity prices, depreciating rupee, likely recession in major economies and weakening exports - credit profiles have adequate headroom to navigate the current challenges, the analysts said.

GDP growth for FY23 has been  forecast by Ind-Ra at a healthy 6.9 per cent, although lower than initial estimates of 7.6 per cent.

To a great extent, the ratings reviewed during the period has factored in the likely impact from the Russia-Ukraine war, as downside risks were visible right at the beginning of the fiscal, the agency said.

“The strengthened financial profile achieved from the deleveraging (EBITDA/net debt) in FY22 had been largely sustained, albeit projected to marginally weaken.

“Business profile is catching up with the improved financial profile. Consumption-led demand and investments (mainly government capex) are supporting issuers to grow their revenues significantly above pre-pandemic levels,” the analysts said.

Downgrades and defaults were contained, as persistent liquidity worries, especially for low credit rated issuers, have been easing, they added.

“Issuers have better access to working capital funds. Credit growth is at multi-year high, as lenders supported the growing working capital needs arising from elevated commodity prices.

“Inadequate liquidity, which was the major factor (48 per cent) in rating downgrades and defaults in FY22, were witnessed in a limited number of downgrade rating actions (15 per cent), and was largely in issuers that had defaulted,” per the agency’s assessment.

Rating downgrades were led by a weaker operating performance and significant lower profitability.

Rating upgrades were also seen in a large number of project companies because of commencement of their operations.

Upgraded sectors

Among the sectors which witnessed positive rating actions are textiles and automobiles within the consumption-led sectors because of a favourable demand and strengthening of financial profile, Ind-Ra said.

Buoyant government spending supported rating actions in the metals & mining and construction & engineering sectors. Commencement of operations led to upgrades in solar power generation projects and commercial realty & warehousing.

“Financial sector issuers saw a high number of upgrades and ratings with positive rating directional indicators, with no downgrades during H1 FY23.

“Ratings benefited from strengthened balance sheets and an improving credit demand outlook, especially from working capital,” Ind-Ra said.

Also helping the sector were the waning legacy asset quality issues, manageable COVID19 impact, shift in borrowings from debt securities and foreign currency market and expectations of improved profitability, particularly for the banking sector, despite the increasing deposit rates and tightening of systemic liquidity.

Downgrades were witnessed largely in wind power generation companies, following a continuous decline in power generation. Other downgrades were scattered across sectors and were due to individual entity-specific factors.

The agency said a higher proportion of rating upgrades was seen in the “BBB” and “BB” categories at about 30 per cent of the reviewed issuers in these categories.

A demonstrated track record of sustaining the improved credit profile supported the rating actions.

Downgrades were also lower Y-o-Y in H1 FY23 in these rating categories. Higher rated categories witnessed a marginal drop in rating upgrades at 17 per cent.

Inflationary pressures in medium term

Ind-Ra observed that macroeconomic pressures are likely to persist over the medium term. The Russian invasion of Ukraine has disrupted the global supply-chain. Commodity prices, particularly energy prices are likely to stay elevated through the coming winter months.

Major global economies are witnessing runaway multi-decade high inflation, leading to a similarly paced global monetary policy tightening.

Ind-Ra rated corporates have performed resiliently in H1 FY23, and a large number of entities are likely to sustain their credit profiles. About 12 per cent of the rated entities carry a positive directional indicator, while only 8 per cent had a negative directional indicator.