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October 03, 2017

Improving financial profiles sustain credit quality recovery

CRISIL’s credit ratio* (or number of upgrades to downgrades) improved to 1.88 times in the first half of the current fiscal, compared with 1.22 times for fiscal 2017. A reading above 1 indicates upgrades outnumber downgrades.

The debt-weighted credit ratio* surged to 3.19 times, versus 0.88 times for fiscal 2017. There were 817** upgrades to 434** downgrades in the first half of fiscal 2018.


And for the first time in the past five years, both these ratios have been above 1 on a rolling 12 months basis, with the credit ratio at 1.59 times and the debt-weighted credit ratio at 1.94 times. This indicates the trend of recovery in credit quality has sustained for a year now. Both these measures, when assessed on a longer timeframe (12 months), negates period bias.


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.


CRISIL-rated companies have shown steady improvement in capital structure and debt protection metrics over the past three years. The median gearing of these companies improved to 1.13 times in fiscal 2017 from 1.35 times in fiscal 2015, and median interest cover to 2.58 times from 2.28 times.


These improvements are broadly on expected lines. In the previous edition of Ratings Round Up, published in March 2017, titled ‘Credit quality improves, but remains fragile’, we had highlighted that the credit quality of several debt-intensive sectors such as metals (especially non-ferrous), sugar, and mid-sized engineering, procurement and construction (EPC) players was improving. This bolstered the debt-weighted credit ratio in the first half of this fiscal.


But what continues to choke the economy’s plumbing is the sticky, high level of stressed assets in banking. CRISIL estimates stressed assets to be around Rs 11.5 lakh crore, or ~14% of total advances as on March 31, 2017.


That means 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 in the latter is that the process of resolution and asset sales has been initiated.


Barring stressed assets, CRISIL expects corporate credit quality to continue recovering, driven by further improvement in balance sheets. Additionally, lower interest rates, stable operating 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. That’s because small and mid-sized firms could see cash-flow pressure as they adjust to the new Goods and Services Tax (GST) regime. And some investment-linked sectors such as real estate and capital goods would continue to face headwinds. Progress on resolution of stressed assets will remain a key monitorable.


CRISIL continues to maintain sharp focus on the quality of its ratings and strives to minimise sudden and sharp rating actions (upgrades and downgrades). Investors also expect ratings in the ‘A’ and above categories to display a lot of stability.


CRISIL’s portfolio of 1,275 ratings in these categories saw 93 rating actions in the first half of this fiscal, of which just 83 were multi-notch changes.