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Business News/ Economy / FY25 credit quality outlook positive for Indian companies: Crisil

FY25 credit quality outlook positive for Indian companies: Crisil

Crisil expects positive credit quality outlook to persist in the first half of the current fiscal year, with upgrades likely outnumbering downgrades.

Prudent capex funding is expected to contribute to credit quality. (Image: Pixabay)Premium
Prudent capex funding is expected to contribute to credit quality. (Image: Pixabay)

NEW DELHI : The credit quality outlook for Indian firms is positive for fiscal year 2025 (FY25), rating agency Crisil on Monday. This optimism stems from strong domestic demand, low corporate debt levels, and the ongoing benefits of infrastructure development.

In the recently concluded fiscal year, Crisil Ratings recorded 409 upgrades for domestic companies and 228 downgrades. These upgrades were primarily driven by robust domestic consumption and considerable government expenditure across various sectors.

Nonetheless, sectors with significant export dependencies, such as textiles and seafood, saw a higher number of downgrades, impacted by weak global demand or challenges related to high-cost inventory that affected profitability.

Crisil Ratings said that the upgrade rate dipped a marginal 70 basis points sequentially to 12.0% in the second half, attributed to strong domestic consumption and government investments. Infrastructure-related sectors, including construction, renewable energy, and road assets, were among the top performers in terms of upgrades.

"The downgrade rate, at 6.7%, remains closer to the 10-year average. As expected, some export-linked sectors, such as textile and seafood saw a higher downgrade rate due to subdued global demand or high-cost inventory that impacted profitability. That said, the reaffirmation rate remained steady at about 81%," it added.

Looking ahead to the first half of FY25, Crisil expects positive credit quality outlook to persist, with upgrades likely outnumbering downgrades. The agency emphasized the multiplier effect of government capital expenditure (capex) on infrastructure and related sectors. Prudent capex funding is also expected to contribute to credit quality.

"While commodity prices have softened, revenue of upgraded companies grew about 13% in fiscal 2024 largely led by a pick-up in volume. With balance sheets in most sectors at their healthiest, capacity utilisation around peak levels and expected interest rate cuts, a broad-based pick-up in private capex is finally in sight," said Gurpreet Chhatwal, managing director at Crisil Ratings.

The agency has identified 21 out of 26 corporate sectors with strong to favourable credit quality outlooks for FY25, thanks to robust balance sheets and healthy operating cash flows. Sectors like auto-components, hospitality, and education benefit from strong domestic demand, while others like construction and manufacturing sectors gain from government infrastructure spending.

On the other hand, specialty chemicals, agrochemicals, textile cotton spinning, and diamond polishing face challenges due to subdued global economic conditions. Except for diamond polishing, these sectors are expected to see a partial recovery after a tough FY24, supported by strong balance sheets, making their outlook stable to moderate.

"Only one corporate sector — auto dealers — is expected to have a moderate credit quality outlook. While cash flows here are expected to grow, balance sheets have relatively higher leverage to fund inventory needs," it said.

All 12 infrastructure sectors have strong to favourable credit quality outlooks, benefiting from government initiatives in renewable energy and logistics, the rating agency said. The residential real estate sector is also expected to thrive on strong consumer demand, with inventory levels likely to decrease in FY25 despite new project launches.

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Rhik Kundu
Rhik writes about the Indian economy and its crucial indicators. He is constantly navigating corporates, decoding policies, and dabbling with everything in between.
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Published: 01 Apr 2024, 05:13 PM IST
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