CRISIL expects credit quality of India Inc to improve

By Raja Iyer

Ratings agency CRISIL expects credit quality trends of Indian companies to improve marginally in 2013-14 on the back of easing demand pressures, softening commodity prices, and a fall in interest rates during the year.

The agency said credit quality constraints on corporate India appear to have bottomed out with the credit ratio (ratio of upgrades to downgrades) at 0.62 times in the Oct-Dec (H2) period of the financial year 2012-13 (April- March).

"The pace of decline in credit ratio has moderated: the ratio has been largely stable in H2 2012-13, unlike in the first half (H1) 2012-13, when it declined sharply to 0.66 from 0.91 in H2 2011-12," the agency said in a press release. The default rate has also been largely stable in both halves of 2012-13, the agency said.

Ramraj Pai, President of CRISIL Ratings said the credit quality cycle may turn for the better, very gradually. In 2013-14, he expects a further reduction in repo rate, a part of which banks are likely to pass on to corporate India.

According to his analysis on CRISIL’s rated portfolio, corporate India’s aggregate interest coverage ratio will improve to 4.0 times in 2013-14 from 3.7 times in 2012-13. Also, companies with an interest coverage ratio of 2.5 times or higher are expected to increase to 49 per cent from 38 per cent of the portfolio, he said in the release.

But the agency warns that rating downgrades may continue to outnumber upgrades over the medium term, given that companies’ stretched working capital cycles are unlikely to improve any time soon.

The agency said downgrades have continued to outnumber upgrades in H2 2012-13ùwith 616 downgrades as against 379 upgrades. The downgrades were driven largely by slowdown in demand and tight liquidity, resulting from stretched working capital cycle.

Companies in the textile, power, construction, and engineering and capital goods sectors accounted for a third of the downgrades. On the other hand, the rating upgrades were supported by improved business performance following stabilisation of recent capacity expansions and discipline in debt servicing; sectors that have had the highest upgrades are the pharmaceutical and packaged foods industries, CRISIL said.