CRISIL’s credit ratio1 (or number of upgrades to downgrades) stood at 1.68 times in the first half of fiscal 2019, compared with 1.88 times and 1.45 times in the first and second halves of fiscal 2018, respectively.
There were 685 upgrades to 408 downgrades in the first half of fiscal 2019.
“For the first time in five years, the credit ratio of investment-linked sectors, at 2.15 times, is higher than the overall credit ratio,” said Somasekhar Vemuri, Senior Director, CRISIL Ratings. “The uptick can be seen in sectors such as steel, construction and industrial machinery that, besides buoyant commodity prices, benefited from the government’s infrastructure spending even as private investments lag.”
As for domestic consumption-linked sectors, the demand growth drivers remain strong, but rising interest rates could act as a mild dampener. Export-linked sectors have seen strong growth in recent months backed by buoyancy in the global economy and a sliding rupee.
However, not all is hunky-dory because corporates face a volatile rupee, rising interest rates and a potential risk of tariff disputes escalating into full-blown trade wars.
CRISIL’s analysis of ~2,500 firms in its portfolio that have foreign currency exposure shows that the impact of recent rupee volatility on profitability will be modest. The top 10 sectors with high foreign currency exposure, which include oil and gas, power and telecom, will see their net profit margins eroding this fiscal by up to 150 basis points. But credit profiles will be cushioned by presence of natural or contracted hedges, ability to pass on increased costs to customers in a buoyant demand environment, lean balance sheets, and support from strong parents or government.
Additionally, after currency, the credit and equity markets have recently turned volatile, which has brought non-banks (non-banking finance companies and housing finance companies) into sharp focus.
“The asset liability maturity profiles of CRISIL-rated non-banks currently remain consistent with their ratings, even as their dependence on short-term capital market instruments has risen in the past two years,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. “While asset quality and capitalisation are comfortable at present, continued market disruption can constrain access to funding, and it will be a key sensitivity factor for both growth and spreads of non-banks.”
Such volatile times are as good a time as any to check the quality of ratings. CRISIL’s ratings continue to exhibit the highest stability and lowest intensity of changes in the industry. Of CRISIL’s 85 rating actions in ‘A’ or above categories in the first half of fiscal 2019, none has been of more than two notches. Over 97% of CRISIL’s rating actions in these categories in the past five years have been of low to medium intensity.
Going forward, CRISIL-rated corporates are expected to sustain their credit risk profiles even in the face of headwinds, backed by strong demand, increased government spending towards infrastructure, and leaner balance sheets. And CRISIL-rated non-banks should be able to navigate the current situation backed by active liquidity management and strong parentage. However, any prolonged liquidity strain could impact non-banks and hence would be a key monitorable.
1 Credit ratio does not factor in rating actions on non-cooperative issuers.