Higher proportion of companies in India got downgraded in the second half of 2022-23 when compared with the first of the fiscal, as interest rate hikes amid stubborn inflation tapered growth and weighed on the credit ratio.
CRISIL Ratings credit ratio (rating upgrades to downgrades) was moderated to 2.19 times in the second half of fiscal 2022-23 from 5.52 times in the first half of the year. In other words, for every downgrade, there were lesser upgrades in the second half, wherein 460 firms were upgraded, as against 210 companies downgraded.
Upgrade rate fell to 13.46 per cent in the second half of 2022-23, which is 320 basis points lower than the first half of the year. However it was still higher than the 10-year average (up to fiscal 2022) of 10 per cent.
The downgrade rate, on the other hand, has gone up to 6.14 per cent and almost reverted to its 10-year average rate.
“Volatile commodity prices have impacted profitability, particularly of micro, small and medium enterprises (MSMEs), while export-oriented sectors face headwinds from slowdown in their major markets,” said Gurpreet Chhatwal, Managing Director, CRISIL Ratings.
About 60 per cent of the downgrades in the second half of fiscal 2022-23 were in the sub-investment grade category and these largely comprised MSMEs. As much as 70 per cent of the downgrades were because of a decline in profitability and/or liquidity pressure.
MSMEs, which benefited from policy interventions during the pandemic, will now have to contend with higher input cost and increasing interest rates — just as repayments on restructured loans begin.
According to rating agency ICRA, inflationary pressure amid weak pricing power was one prominent credit theme that prompted downgrades in FY2023.
The debilitating effect of cost inflation was seen across multiple sectors, including building materials, food products, pharmaceuticals, gas-based power plants, etc. Rupee depreciation against the US Dollar provided another inflationary prop to commodity prices, and hence weighed on profits, ICRA said.
With economic growth in the advanced economies expected to falter in the financial year 2023-24, the export-oriented sectors like textiles and gems and jewellery will likely face demand headwinds in the near term, a phenomenon already in play since the second half of 2022-23.
The IT services sector too could face demand challenges depending on the extent to which discretionary IT spending slows, following the global macro-economic headwinds, setbacks seen in the financial services sector in the US (marked by recent regional bank failures), and the adverse impact on the technology sector caused by the retraction of easy money policies and its manifestation in employee lay-offs, the rating agency said.