Mumbai: For the first time in three years, credit assessor Crisil Ltd has upgraded more companies than it downgraded in the second half of the fiscal ended March, and said the Indian economy appeared to have put the worst behind it.
In that period, the Indian unit of Standard and Poor’s raised the ratings on 108 entities and lowered them on 95, Crisil said on Wednesday.
“The number of defaults too declined during the second half of the year to 20 from 29 in the first half,” Crisil said in its semi-annual credit quality report.
The reversal resulted in its modified credit ratio (MCR)— the ratio of upgrades plus reaffirmation to downgrades plus reaffirmation—increasing for the full fiscal year, snapping a decline that began in fiscal 2006.
The MCR for 2010 increased 0.93 time, from 0.86 time a year ago.
The rating agency said that it believes the worst is over for the Indian economy, and that “present trends indicate that upgrades will outnumber downgrades in 2010-11”.
Sectors such as metals and mining, auto ancillaries and construction featured in both downgrades and upgrades. Banks and financial services, and public sector banks in particular, were on the upgrade list. Public sector banks were aided largely by the government’s commitment to recapitalise them and support growth.
Export-oriented companies managed to recover from a slowdown fairly quickly as they managed their receivables well, Ajay Dwivedi, a director at Crisil Ratings, said in a teleconference on Wednesday. They also developed quick responses to demand, scaling operations up or down as needed, avoiding stocking excess inventory and cutting costs.
However, the sustainability of exports remains to be seen as it is not clear yet whether healthy US consumption numbers in the last quarter reflected “restocking of inventory or genuine retail demand”, he said.
Risk factors such as sustainability of demand growth, a global credit event on sovereign debt, impact of inflationary expectations on interest rates, and exchange rate volatility may also turn out to be spoilers.
Besides, Crisil still has negative outlook on 13% of its outstanding portfolio although the number is down from the first half, at 16%.
Real estate firms and their dependent industries accounted for 18% of the “negative” outlooks followed by textiles at 12% as these industries are still highly leveraged, and will require strong demand revival or large equity infusions to stabilize.
The textile industry runs the additional risk of being exposed to exchange rate fluctuations.
Construction companies accounted for almost 20% of the positive outlooks and are witnessing robust demand due to the government’s increased focus on infrastructure spending. However, “commercial real estate and leisure industries are likely to face severe demand-supply imbalances”, the report warned.