Better financial indicators on account of corporates keeping away from capital expenditure and lower interest cost have had a salubrious impact on their ratings, going by Crisil’s credit ratio (upgrades to downgrades ratio). This ratio improved to 1.88 times in the first half the current financial year compared with 1.17 times in the year-ago period.

What this means is that in the reporting first half, the number of companies whose ratings got upgraded was 1.88 times more than those whose rating got downgraded. A reading above one indicates upgrades outnumbering downgrades.

Upgrades, downgrades According to the credit rating agency, in the first half of FY18, there were 817 upgrades (646 in the year-ago period) to 435 downgrades (553 downgrades).

The debt-weighted (quantum of debt outstanding on the books of companies upgraded to downgraded — excludes financial sector players) credit ratio surged to 3.19 times in the reporting half-year versus 1.92 times in the year-ago period.

“For the first time in the past five years, both these ratios are above one on a rolling 12 months basis…This indicates that the trend of recovery in credit quality has sustained for a year now,” said Pawan Agrawal, Chief Analytical Officer.

On a rolling 12 months basis, the credit ratio stood at 1.59 times (0.9 time in the year-ago period) and the debt-weighted credit ratio at 1.94 times (0.4 time).

“The improvement has come about primarily because of better financial indicators as corporates kept away from capital expenditure given the output gap (or substantial headroom in capacity utilisation) in many sectors. We expect this trend to continue till demand firms up. Lower interest costs will provide further support,” said Agrawal. Improvement in the credit quality of companies in debt-intensive sectors such as metals (especially non-ferrous), sugar, and mid-sized engineering, procurement and construction has bolstered the debt-weighted credit ratio in the first half.

Capital structure The agency said the companies rated by it have shown a steady improvement in capital structure and debt protection metrics over the past three years.

The median gearing (level of debt as a proportion of equity) of companies has improved to 1.13 times in fiscal 2017 from 1.35 times in fiscal 2015, whereas the median interest cover (ability to pay interest on outstanding debt) improved to 2.58 times in fiscal 2017 from 2.28 times in fiscal 2015. Crisil cautioned that what continues to choke the economy’s plumbing is the high level of stressed assets in banking, which is around ₹11.5-lakh crore, or about 14 per cent of total advances as of March 31, 2017.

“Indeed, the credit quality of India Inc is a tale of two distinct loan books. The good one is where we have been seeing improvements over the past year, and which should sustain.

“The bad one is where there are sizeable stressed assets. The only salutary part here is that the process of resolution and asset sales has been initiated,” said Somasekhar Vemuri, Senior Director.

Barring stressed assets, Crisil expects the corporate credit quality to continue recovering, driven by further improvement in balance sheets. Additionally, lower interest rates, stable working capital cycles, firm commodity prices and improving domestic consumption demand will also help.

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