Executive summary

CRISIL Ratings saw its credit ratio¹ increase further in the first half of fiscal 2022, with 488 upgrades and 165 downgrades, reflecting a sharp and sustained recovery in demand despite the intense second wave of Covid-19 infections in the first quarter.

This was the second consecutive rise in the credit ratio, at 2.96 times. It had risen to 1.33 times in the second half of last fiscal from 0.54 times in the previous half.

The outlook for India Inc’s credit quality remains ‘positive’².

A sustained recovery in domestic demand, government impetus to infrastructure spending, and export growth, spurred by a buoyant global economy as well as the ‘China plus one’ sourcing strategy of global players, have led to a strong rebound in business risk profiles of India Inc, thereby driving the increase in upgrades.

Among manufacturing sectors, steel makers benefitted from a combination of strong global demand and production cutbacks in China owing to environmental concerns, leading to high realizations. Pharmaceuticals and specialty chemicals also sustained their strong performance trajectory, backed by global demand. Agro commodities, such as sugar and edible oil, also benefitted from steady domestic demand growth. In the automobile sector, especially two wheelers, the recovery is delayed to beyond fiscal 2022 extent due to sluggish rural demand, though balance sheets remained strong indicating unscathed credit profiles.

Infrastructure-linked sectors, such as roads, renewable energy, and construction and engineering, continue to benefit from government spending and correspondingly strong order books, as well as the improving pace of execution.

The services sector, too, is finally turning the corner after a debilitating fiscal 2021. Its credit ratio rose to above 1 time for the first time since the onset of pandemic, on the back of select sectors.

To be sure, services continue to lag the manufacturing and infrastructure-linked sectors in demand recovery, and correspondingly, still have a much lower credit ratio. Travel and hospitality, and education services are among sectors still seeing tepid recovery. Health care, among the contact-intensive service sectors, and information technology, among other services sectors, actually benefitted amid the pandemic as they successfully addressed challenges pertaining to health, remote working and information security that emerged during the pandemic.

India Inc also continued the trend of deleveraging for the sixth straight year in the previous fiscal, uninterrupted by cash-flow disruptions and emergency funding requirements caused by the pandemic. A strong run of primary issuances in equity markets also supported the balance sheet strengthening.

Improving financial profiles provide a cushion for future shocks, including a potential third wave, as well as for re-leveraging, when the private capex cycle resumes over the medium term.

¹ Refers to the ratio of upgrades to downgrades. Excludes rating actions involving ratings with the Issue-not-cooperating (INC) suffix
² See ‘India Inc credit outlook turns positive, upgrades rise’ - CRISIL Ratings Press Release dated August 18, 2021