Mumbai: In financial year 2016-17, consumption-linked sectors such as auto ancillaries, packaging and agricultural products continued to drive upgrades, while downgrades continued to dominate investment-linked sectors such as real estate, metals and construction and industrial machinery, said rating agency Crisil Ratings.
Consumption was aided by monsoon, implementation of the Seventh Pay Commission and One Rank One Pension (OROP) recommendations but demonetisation became a dampener towards the end of calendar 2016, especially for rural consumption, the rating agency said in a report, Round-up Fiscal 2017.
Demonetisation also slowed down the pace of upgrades of consumption-linked sectors, it added.
According to the Crisil report, the pace of downgrades declined in the metals sector due to stabilization in prices, policy support in the form of anti-dumping duty and minimum import price and gradual improvement in demand from affordable housing, urban infrastructure and railways.
The rating agency’s upgrade rate moderated to 9.4% in FY17 from 11.3% in FY16, while the downgrade rate declined to 7.7% from 8.4% in the period. Crisil’s rating portfolio for fiscal year 2017 saw 1,335 upgrades compared to 1,092 downgrades in FY17.
“This helped the credit ratio hold above 1 time in fiscal 2017 at 1.22 times—or quite similar to 1.29 times in fiscal 2016,” Crisil said.
It added that the credit quality of corporate India is gradually recovering but underpinning remains fragile still. In fiscal year 2017, debt-weighted credit ratio—the ratio of debt held by firms whose debt ratings have been upgraded against that of firms whose ratings have been downgraded—improved to a five-year high of 0.88 time, against 0.31 time in 2015-16, Crisil said.
The rating agency also said that almost half of rating actions were because of financial profile reasons as almost three-fourths of rating actions in fiscal year 2017 were in the sub-investment grade (“BB” or lower).
The financial reasons for upgrade were better liquidity and improvement in capital structure, while business reasons were mainly robust demand growth and improvement in operating margins.
“Firms upgraded in fiscal 2017 continued to display distinctly better profile compared with those downgraded. Upgraded firms in general had higher profitability, lower indebtedness and better working capital management,” it added.
Liquidity was the key financial reason for more than a third of the downgrades, stemming from lower cash accrual and higher bank limit utilisation. “Weak demand, pressures on operating profitability, and elongated working capital cycle were the main business reasons for downgrades,” Crisil said.
Meanwhile, CARE Ratings said that in March 2017, its Ratings Debt Quality Index (CDQI) saw the largest decline in FY17 to 89.81, influenced primarily by a few downgrades in “AAA” and “A” category ratings. CDQI denotes the quality of debt that can be interpreted over time and juxtaposed with other developments in the financial sector. “Currently, the volume of debt of the sample companies stands at Rs29.53 lakh crore in March 2017,” CARE Ratings said in a note.