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Credit ratings of Indian companies have improved significantly in the fiscal first half, indicating a likely end to pressures on the credit quality of firms that emerged from weak economic growth and covid-induced disruptions.

Unlike the first wave, businesses faced limited supply-side disruptions during the second wave of the pandemic as companies remained operational, adapting to the new normal, said experts.

Credit profiles were sustained by supportive monetary and fiscal measures such as the Reserve Bank of India’s resolution framework 2.0 for micro, small and medium enterprises, emergency credit line guarantees available till March-end and the Union government’s relief package for stressed sectors.

Companies saw an improvement in their ratings from three credit rating agencies.

Icra upgraded ratings of 303 entities, reflecting an improvement in the credit profile of 10% of its portfolio, the highest pace of upgrades in a decade. In the April-September period, there were 163 downgrades by Icra, much lower than the 483 downgrades in FY21 and 584 in FY20.

Icra said the overall rating action trends are a clear marker that the period of economic uncertainty and excessive pressures seen on business and financial risk profiles of entities is most likely over.

According to Crisil Ratings Ltd, the credit ratio in the fiscal first half rose to 2.96 with 488 upgrades against 165 downgrades. The ratio was 1.33 in the previous six months. Credit ratio is defined as the ratio of the number of upgrades to downgrades. A ratio of more than 1 indicates there are more upgrades than downgrades and vice versa.

“Most rating upgrades were coming from areas like construction and engineering, renewable energy. Improved pace of project execution and higher capital spending clearly supported the credit profile of these companies," said Somasekhar Vemuri, senior director, Crisil Ratings Ltd.

The rating agency said domestic companies coped well with covid-induced uncertainties, with business activity holding up relatively better despite a far more virulent wave in the June quarter. Manufacturing and infrastructure-linked sectors were largely unaffected by the second wave; services followed suit, with the credit ratio rising to above one for the first time since the onset of the pandemic.

Sectors such as healthcare and information technology benefited from the pandemic as these addressed challenges emerging from the health crisis, such as health and information security.

India Ratings and Research upgraded ratings of 150 issuers while downgrading only 49 issuers during this period. This is in stark contrast to the trend witnessed in the past two years when downgrades far exceeded upgrades. The corporate downgrade to upgrade ratio was at a low of 0.3 compared to 2.1 in the first half of FY21 and 1.4 in the full year. Defaults of cooperative issuers in H1FY22 were also lower at 1.4% against 2% in the first half of FY21.

India Ratings said the corporate credit profile of domestic companies posted its best performance in over half a decade during the first half of this fiscal.

Positive rating actions were seen despite the devastating second covid wave.

According to Arvind Rao, director, India Ratings, for manufacturing and service corporates, the improvement in credit profile is the outcome of unprecedented deleveraging. “Strong cash flows, which were used to reduce debt levels, and curbing near-term investments have resulted in median expected net leverage improving to around 1.7 times in FY22 from 3.1 times in FY19 for the issuers which were upgraded during the first half of FY22. For these corporates, revenues are expected to show marked growth of 27% in FY22 over FY19. These corporates exhibited a resilient performance through FY21 also, with most of the metrics on a trajectory of outperformance," he said.

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