India Inc's credit quality improves sharply in H2FY21, likely to sustain

The credit ratio improved to 1.33 in the second half of the financial year 2021, from a decadal low of 0.54 in the preceding half

Improvement in economic climate and policy measures have helped in a sharp reversal in the ratio of upgrades to downgrades of company debt and led to expectations of the same being sustained going forward, domestic credit rating agency Crisil said.

The credit ratio, which denotes the number of firms upgraded for each downgrade, improved to 1.33 in the second half of the financial year 2021, from a decadal low of 0.54 in the preceding half, while the debt-rated credit ratio which acts by the quantum of loans outstanding improved to 1.26 from 0.52, it said.

“From an outlook perspective, credit quality will sustain in the next fiscal because of the fiscal policies in the budget, unlocking which is underway,” its managing director Gurpreet Chhatwal told reporters.

The agency, which rates over 8,000 entities, flagged the rising number of the Covid-19 infections as a key risk going forward which makes it “guarded” in its optimism from the future perspective.

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Chhatwal, however, said the ongoing vaccination drive, coupled with a belief that the lockdowns will be very localised in nature, can help ensure that the damage is limited.

Chhatwal said the agency expects the GDP to expand by 11 per cent in FY22, after a 7.7 per cent contraction in FY21 due to the pandemic.

The agency specifically pointed out emergency credit line guarantee scheme and one-time restructuring as some of the effective policy measures which have helped minimise the impact on the economy.

Of the 42 sectors in the economy, 34 sectors accounting for over 89 per cent of the debt have come back to the pre-pandemic levels where the demand is robust, the agency said.

Six sectors like aviation and hospitality, which account for four per cent of the debt, are, however, yet to come out of the woods, it said.

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Chhatwal said some sectors like construction, renewable power and auto have surprised the agency by staging a quicker recovery from the setback of the pandemic.

Moderately resilient sectors like construction, engineering and renewable power witnessed increased upgrades even though credit ratio for the category remained below 1, while high resilience sectors like pharmaceuticals and agrochemicals continued with a credit ratio of above 1, it said.

The agency’s smaller rival Icra said the trough is behind us, as the rating action trends since November 2020 suggest that incremental downgrade pressures have ebbed. At the same time, the proportion of rating upgrades has been on the rise over the past two quarters.

The agency downgraded 483 ratings in the financial year 2021 as against 293 upgrades, it said.

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“A broad resumption in economic activity, post the lifting of the lockdown, supported in ample measure by the fiscal and monetary policy interventions, has allowed businesses to recover, even as the recovery remains uneven thus far,” its deputy chief rating officer K Ravichandran said.

In its base case, the overall credit quality of India Inc. is “on the mend”, which is reflective in the rising trend in upgrades seen since the third quarter of the financial year 2021 and the smaller count of sectors carrying a negative outlook, he added.

Hospitality, textiles, real estate, construction, and automobile dealerships experienced high downgrades, the agency said, adding it has a negative outlook on aviation, hospitality, power (thermal power producers and distribution entities), real estate (residential and retail), retail, shipping (tanker segment), telecom, and non-banking finance companies.