Reflecting increased pressure on corporate India’s credit quality, Crisil’s credit ratio (ratio of upgrades to downgrades) declined to 0.66 in the April-September period of 2012-13 from 0.91 in the corresponding year ago period.
The credit rating agency attributed this phenomenon primarily to the slowdown in the economy.
Rating downgrades continued to exceed upgrades in the reporting period — there were 484 downgrades and 320 upgrades, on an expanded base of 10,542 ratings, said Crisil.
The downgrades were driven largely by slowing demand and pressure on liquidity, because of stretched working capital cycles.
Of the 484 downgrades, 183 were to ‘default’ category—these were primarily from rating categories ‘Crisil BB’ and lower, which are inherently more vulnerable to defaults.
The rating upgrades, on the other hand, were supported by improved business performance due to stabilisation of past capital expenditure, and consequently, improved cash flows.
Ramraj Pai, President, Crisil Ratings, said, “Around a third of the downgrades has been among the highly-indebted industries, including power, construction, engineering and capital goods, and textiles”.
The highest upgrade rates, on the other hand, were in the retail consumption linked sectors, such as packaged foods and home furnishing.
Credit ratio bottoming out
With pressure on profitability and on economic growth showing signs of abating, Crisil said the credit ratio has begun to bottom out.
Material improvement in the credit ratio will, however, take time and need substantial revival in demand.
Over the near term, rating downgrades will continue to outnumber upgrades, although their severity and intensity may decline.
According to Roopa Kudva, MD & CEO, Crisil, “The end of a credit quality cycle is always an important juncture. We believe that point is now near. Having declined continuously for nine quarters, EBIDTA margins are now likely to increase.
“Also, the pressure on GDP growth seems to have eased. Together, these factors should ensure that the credit ratio does not decline materially from current levels.”
Based on an analysis of the aggregate financials of 280 large companies across 28 key sectors, Crisil estimates that EBIDTA margins (earnings before interest, tax, depreciation and amortisation (EBITDA) divided by total revenue) will improve by 20 to 40 basis points in the quarter ended September 2012.
Crisil expects GDP to grow at 5.5 per cent in 2012-13, and to improve further in 2013-14.
Renewed confidence in growth will drive improvement in the working capital situation for corporates, and therefore, support credit quality.