Mumbai: Rating agencies have contrasting views about the credit quality of Indian companies in the April to September period of this year. According to Crisil, the credit ratio, or the number of upgrades to downgrades, was 1.68 in the first half of 2018-19, compared with 1.88 and 1.45 times in the first and second halves of 2017-18, respectively.
There were 685 upgrades to 408 downgrades in the first half of 2018-19, it said.
According to Crisil, the debt-weighted credit ratio was 1.20 in April to September, down from1.53 in the second half of 2017-18. Debt-weighted credit ratio refers to the ratio of upgrades to downgrades weighted by the quantity of debt.
“Both the credit ratio, and the debt-weighted credit ratio remain well above 1 on this basis, indicating a broad-based sustenance of credit quality," Crisil said in a report on 1 October.
For the first time in five years, the credit ratio for investment-linked sectors was 2.15 times printed higher than the overall credit ratio. The improvement was in sectors such as steel, construction and industrial machinery which, besides buoyant commodity prices, benefited from the government’s infrastructure spending even as private investments lag. According to Crisil, the jump in the credit ratio was driven by investment-linked sectors while growth in GDP and the uptick in the Index of Industrial Production (IIP) were supportive. Also, the government’s spending on infrastructure, especially roads and affordable housing, boosted activity in investment-linked sectors.
Meanwhile, Icra Ltd’s rating actions in first half of 2018-19 point to an increase in downward pressure on investment-grade entities. “This is reflected in the rating drift of investment-grade entities turning negative in the first half of 2018-19 for the first time since 2013-14, as well as the rise in the downgrade rate of investment-grade entities," it said. The rating drift of investment-grade entities deteriorated to -5.1% (annualized) in the first half of 2018-19 (3.2% in 2017-18) against the past five-year average of 4.3%. Also, the downgrade rate of investment-grade entities rose to 8.3% (annualized) in the first half of 2018-19 (7.1% in 2017-18), a five-year high, according to Icra.
The default rate of Icra-assigned ratings dropped to 2.8% in the first half of 2018-19 from 3.4% in 2017-18 and against the past five-year average of 3.3%. “This apart, the large rating change rate too softened to 3.6% in the first half of 2018-19 from 4.1% in the previous year, highlighting the overall reduction in the severity of rating changes. What was also prominent in the first half of 2018-19 was the sharp increase in the total volume of debt upgraded by Icra," it added.
However, Crisil is cautious that rising interest rates may be a mild damper for domestic consumption-linked sectors despite demand growth drivers remaining strong. It also said that ‘all is not well’ as corporate India faces a volatile rupee, rising interest rates and an increase in the risk of tariff disputes between major global economies turning into full-blown trade wars.
Crisil’s analysis of 2,500 firms in its portfolio that have foreign currency exposure shows that the impact of recent rupee volatility on profitability will be modest. The top 10 sectors with high foreign currency exposure, which include oil and gas, power, and telecom, will see their net profit margins eroding this financial year by up to 150 basis points.