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Outlook positive, but downside risks loom

Ratings Round-Up | First half, fiscal 2024

Executive summary

First-half credit ratio at 1.91 riding on domestic demand, government capex

The CRISIL Ratings credit ratio, or the proportion of rating upgrades to downgrades, moderated in the first half of this fiscal to 1.91 from 2.19 in the second half of last fiscal.

There were 443 upgrades and 232 downgrades. A ratio above 1 means upgrades outnumbering downgrades.

The first-half upgrade rate dipped marginally to 12.70% compared with 13.46% in the preceding half. However, it continues to be above the decadal average of ~10%. The upgrades were driven by an expected expansion in cash flows this fiscal for sectors linked to domestic demand and for those benefiting from high government spending. These sectors, such as infrastructure, services, and consumables, kept the overall upgrade rate elevated.

Infrastructure and linked sectors¹ accounted for around 29% of the upgrades in the first half. To be sure, infrastructure has benefited not just from high budgetary allocation, but also from better risk sharing among stakeholders and acceptance of investment vehicles such as InvITs, or infrastructure investment trusts.

The overall downgrade rate, meanwhile, rose to 6.65% (6.14% in the previous half), inching closer to the average of ~7% for the past decade. The downgrade rate was seen inching up for export-oriented sectors as well, even as strong balance sheets somewhat cushioned the impact of heightened risks overseas.

The proprietary CRISIL Ratings Corporate Credit Health Framework provides our credit quality outlook on 43 sectors (accounting for ~75% of the rated debt2) for the fiscal. It analyses operating cash flow strength (change in absolute estimated Ebitda3 on-fiscal) and balance sheet strength expected by this fiscal-end.

The key takeaways from the fourth edition of the CRISIL Ratings Corporate Credit Health Framework:

• The most buoyant bucket has 21 sectors - compared with 19 in H2FY23 - with favourable cash flows (more than 10% expansion in estimated Ebitda) and robust balance sheets. They account for 44% of the overall rated debt. Sectors aligned to the domestic story, such as automobile manufacturers and ancillaries, dairy, fast-moving consumer goods, renewable power, primary steel, capital goods, cement and hospitality dominate this bucket. The sectors in this bucket have a positive credit quality outlook
  
• There are 16 sectors with strong to very strong balance sheets and moderate operating cash flow strength (0% to 10% expansion in operating cash flows). Their credit quality outlook varies from positive to stable. These include segments of the infrastructure sector such as road assets, thermal power, construction and engineering, and real estate
  
• Six sectors will face headwinds in terms of operating cash flows or balance sheet strength. The export-oriented and commodity-linked sectors in this bucket are likely to see an impact on operating cash flows, while their balance sheets remain heathy. Export-oriented sectors such as textiles - cotton spinning and diamond polishingcould see operating cash flows shrink. Commodity-linked sectors, where realisations have been impacted due to supply-side glut - such as agrochemicals and specialty chemicals - will be affected, too. These sectors are likely to witness pressure on their credit quality

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