The credit quality of India Inc. continued to strengthen in H1 FY23, carrying on with the momentum set in motion since the beginning of FY22, according to ICRA.

In H1 (April-September) FY23, as in FY22, instances of rating upgrades by ICRA were over three times that of downgrades.

The credit ratio was 3.3 in H1 FY23 against 2.8 and 0.5 in H1 FY22 and H1 FY21 respectively.

With ICRA upgrading the ratings of 18 per cent of its portfolio entities in H1 FY23 on an annualised basis (and prior to that an equally high 19 per cent in FY22), the upgrade rate reflected a significant mark-up over the past 5-year and the past 10-year average of 11 per cent.

The upgrade rate is defined as the number of entities upgraded in the period of analysis as a percentage of the total number of rated entities as of the beginning of the period. This calculation excludes the AAA and A1+ rated entities.

“The upgrades in the just-concluded half-fiscal were concentrated in a few sectors. Real estate, textiles, financials, engineering, construction, and roads sectors constituted the upgrade leaderboard for H1 FY23.

“These six sectors accounted for almost half of the total upgrades by ICRA in H1 FY23, while constituting one-third of ICRA’s rated portfolio,” per the agency’s analysis.

On a leash

Jitin Makkar, Senior Vice President and Head, Credit Policy, ICRA, observed that the rating downgrade rate at 5 per cent remained on a leash in H1 FY23 (6 per cent in FY22) in comparison with the past 5-year average of 12 per cent and the past 10-year average of 9 per cent.

Downgrade Rate is defined as the number of entities downgraded in the period of analysis as a percentage of the total number of rated entities as of the beginning of the period. Its calculation excludes D-rated entities.

Makkar reasoned that the business rebound post the pandemic, limited capital expenditures and hence, restrained fresh term borrowings, and organic reduction in the existing balance sheet debt kept the incremental downside credit risks low.

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

“If the instances of downgrades in H1 FY23 were low, the occurrence of defaults was seen to be even lower. There were only five defaults in ICRA’s portfolio in the recent half-fiscal, compared with 42 in FY22 and 44 in FY21, with four out of the five defaults being from the non-investment grade,” he said.

ICRA’s outlook

The above trends indicate that 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, per ICRA’s analysis.

These developments have manifested in inflationary pressures, interest rate hardening, and the weakening of the Indian currency against the US Dollar.

With commodity prices receding from their recent peaks and with trends in softening export demand, ICRA revised its outlook on the Ferrous Metals, Non-Ferrous Metals, and Textiles (Cotton Spinning) sectors to Stable from Positive in H1 FY23. This implies that the realisation growth-led upward rating inducements in these sectors which were strongly at display in FY2022, are unlikely to drive rating actions in these sectors in the near term.

The agency also revised its outlook on the Retail (Fashion) and the Airport Infrastructure sectors to Stable from Negative in recent months as the operating metrics in these sectors are on their path to rebounding to their pre-Covid levels.

The sectors that continue to remain on a negative outlook include airlines, media and entertainment (Exhibitors and Print), and power (Thermal and Distribution). In comparison, two sectors are currently on a positive outlook -- oil and gas (Upstream) and roads (Toll).

K Ravichandran, Chief Rating Officer, ICRA, observed, “We forecast India’s GDP to grow by 7.2 per cent in FY2023…as the demand for contact-intensive services remains buoyant and a pick-up in private and government capital expenditure looks on the anvil.

“A significant hardening of interest rates, however, is a risk factor that would impact discretionary spending, make debt less affordable, and restrain capex.” 

Further, an escalation in geopolitical conflicts, a global recession, and global fund flows (inter-related, not distinct factors) would challenge India’s macroeconomic fundamentals, even if not as much in relation to the other economies, he said, adding these factors, directly or indirectly, would have a bearing on the credit quality trendlines.

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