CRISIL’s credit ratio* (or upgrades vs downgrades) improved to 1.88 times in the first half of this fiscal, compared with 1.22 times in fiscal 2017. A reading above 1 indicates upgrades outnumbering downgrades. The debt-weighted1 credit ratio* surged to 3.19 times, versus 0.88 time for fiscal 2017.
There were 817 upgrades to 434 downgrades in the first half of fiscal 2018.
“For the first time in the past five years, both these ratios are above 1 on a rolling 12 months basis,” said Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings. “The credit ratio stood at 1.59 times and the debt-weighted credit ratio at 1.94 times. This indicates that the trend of recovery in credit quality has sustained for a year now.”
Assessing the two ratios on a longer timeframe such as a 12 months rolling basis obviates period bias and indicates the trend could become structural in nature.
“The improvement has come about primarily because of better financial indicators as corporates kept away from capital expenditure given the output gap – or substantial headroom in capacity utilisation – in many sectors. We expect this trend to continue till demand firms up. Lower interest costs will provide further support,” said Agrawal.
CRISIL-rated companies have shown a steady improvement in capital structure and debt protection metrics over the past three years. The median gearing of companies has improved to 1.13 times in fiscal 2017 from 1.35 times in fiscal 2015, whereas median interest cover improved to 2.58 times in fiscal 2017 from 2.28 times in fiscal 2015.
This improvement is broadly on expected lines. In our previous Ratings Round Up published in March 2017 titled ‘Credit quality improves, but remains fragile’, we had underscored the improvement in the credit quality of companies in debt-intensive sectors such as metals (especially non-ferrous), sugar, and mid-sized engineering, procurement and construction (EPC). This is what bolstered the debt-weighted credit ratio in the first half.
However, what continues to choke the economy’s plumbing is the high level of stressed assets in banking, which CRISIL to be around Rs 11.5 lakh crore, or ~14% of total advances as of March 31, 2017.
Says Somasekhar Vemuri, Senior Director, CRISIL Ratings: “Indeed, the credit quality of India Inc is a tale of two distinct loan books. The good one is where we have been seeing improvements over the past year, and which should sustain. The bad one is where there are sizeable stressed assets. The only salutary part here is that the process of resolution and asset sales has been initiated.”
Barring the stressed assets, CRISIL expects the corporate credit quality to continue recovering, driven by further improvement in balance sheets.
Additionally, lower interest rates, stable working capital cycles, firm commodity prices and improving domestic consumption demand will also help.
However, the credit ratio and the debt-weighted credit ratio would moderate from here and will track GDP growth.
Small and mid-sized firms could also see cash flow pressures as they adjust to the new Goods and Services Tax regime. And some investment-linked sectors such as real estate and capital goods would continue to face headwinds.
Going forward, progress on resolution of stressed assets will remain the key monitorable.