Mumbai: The pace of corporate ratings downgrades increased in the second half (H2) of fiscal 2011 (FY11) even as upgrades moderated because of delays in loan repayment, project implementation and reduced demand, according to a report by Icra Ltd.
Icra said even though the total number of upgrades as a percentage of all live ratings rose to 13.8% in FY11 from 9.24% in the previous fiscal, the trend has shifted towards downgrades in the second half of FY11 and is likely to continue that way in the year to 31 March 2012.
Live rating is defined as number of issuers with outstanding rating as on 1 April or 1 October.
Sugar makers, hotels and power companies were among the worst affected, with percentage of downgrades rising 25% among sugar companies, 13% for hotels and 20% for power, Icra said.
Upgrades will continue to moderate, while downgrades will increase going forward because of slowdown in demand, compression of operating profitability because of cost factors, high interest rates and lacklustre capital markets constraining access to equity, said Naresh Takkar, managing director and chief executive of Icra.
“H2 showed a break of pattern, with the total upgrades as a percentage of opening issuers moderating to 5.83% from 6.54% in H1 of 2010-11, and the total downgrades as a percentage of opening issuers rising to 5.34% in H2 of 2010-11 from 3.73% in H1 of 2010-11,” the Indian unit of credit rating company Moody’s Corp. said. Icra rates 3,500 companies, both large and small, in India, according to Takkar.
“The macro environment like inflation and interest rate hikes was the reason for the delay in repayment and project implementation,” he said.
The inverse credit ratio, or the ratio of downgrades to upgrades, has increased steadily in the past eight quarters, Icra said.
“Inverse credit ratio, which had declined steadily from 5.13 in Q1 of 2009-10 (quarter ended June 2009) to 0.42 in Q2 of 2010-11, rose gradually to 0.87 in Q3 of 2010-11 and further to 1.00 in Q4 of 2010-11,” Icra said.
The report mirrors a similar study by credit rating company Crisil Ltd, which said that rising input costs, higher interest rates and the likely impact on consumption demand will erode company profits and, hence, ratings in FY12.
Crisil uses a measure known as the modified credit ratio (MCR) to gauge performance.
MCR is the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations, according to Crisil.
Reaffirmations are credit ratings of companies that have not changed.
MCR is likely to fall in FY12, as more companies may get downgraded because of stretched credit quality and pressure on corporate profitability, Pawan Agrawal, director of corporate ratings at Crisil Ratings said.
Crisil rates 6,173 companies.