Corporate credit health likely to drop in FY12

Corporate credit health likely to drop in FY12

Mumbai: Rising input costs, higher interest rates and the likely impact on consumption demand are expected to erode company profits and, hence, ratings in fiscal 2011-12 (FY12), a study by credit rating agency Crisil Ltd said on Wednesday.

Crisil said it upgraded 605 companies in FY11 and downgraded 269.

The agency 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 for FY11 was 1.1 compared with 0.93 in FY10. In FY11, ratings for 5,299 companies did not change.

MCR is just off its all-time peak of 1.16 in FY05 and is likely to fall in FY12 as more companies may get downgraded due to stretched credit quality and pressure on corporate profitability, said Pawan Agrawal, director, ratings.

“It has already started to happen in the second half of 2010-11 as higher commodity prices increase input costs and the ability of companies to pass on these costs to consumers declines," Agrawal said.

Crisil rates a total of 6,173 companies, which account for 40% of the outstanding bank credit. As much as 88% of the ratings are unchanged.

The report comes just a day after Reserve Bank of India (RBI) deputy governor Subir Gokarn told business leaders to expect “a little bit of pain now, with the prospect of less suffering in the future".

RBI has already hiked its repo rate eight times by a total of 200 basis points since March 2010 to rein in inflation. One basis point is one-hundredth of a percentage point. Wholesale price inflation at 8.31% in February is still beyond RBI’s target of 8% and rates are expected to be raised by at least another 50 basis points in this fiscal.

Crisil expects profitability to be impacted and, hence, more downgrades in sectors such as cement, chemicals, construction, automobiles and textiles, mainly because delays in project implementation stretch cash flows or force companies to take more debt. “Ratings are impacted for companies that are leveraged like, for example, textile companies. Ratings are given on the basis of expectation of future cash flows," Agrawal said.

In FY11, microfinance, construction and industrial machinery companies were among those downgraded, while steel, pharmaceuticals and banking firms were upgraded.

Crisil expects economic growth at 8.3% in FY12, down from 8.6% in FY11, as high interest rates erode consumption demand.