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April 01, 2019

CRISIL Ratings Round-Up: Credit ratio edges up, some headwinds ahead

CRISIL’s credit ratio – or the number of upgrades to downgrades – at 1.81 in the second half (H2) of fiscal 2019, is marginally up from 1.68 in the first half.


There were 594 upgrades and 328 downgrades in the second half, a period marked by rebound in exports, and continued government spending.


Nearly 60% of the upgrades were in investment-linked and export-linked sectors. The former benefited from government spending on infrastructure, while benign global growth, weaker rupee and easing of GST glitches helped up exports.


The positive trend in credit ratio is also consistent with asset quality as seen in the banking sector, where incremental slippages in non-performing assets declined sharply to 3.7% in H2, compared with 3.8% in H1 and an average of ~6% in fiscal 2017 and 2018.


CRISIL’s debt-weighted credit ratio stood at 0.89 in H2, a dip from H1, primarily on account of downgrade of two large telecom companies1. Shorn of these two, which accounted for nearly 56% of downgraded debt by value, the ratio was higher at 2 times.


Among consumption-linked sectors, brick & mortar retailers and consumer goods companies are well-positioned to benefit from demand growth, especially in the value segments. Auto component makers will continue to gain from more stringent emission norms and other regulations for vehicle makers.


While increased private consumption supported by budgetary announcements augur well for the fiscal 2020 credit outlook, some headwinds are gathering. We expect moderation in the credit ratio as global growth slackens and pace of government infrastructure spending slows.


Slower growth in government spending on infrastructure also means investment-linked sectors such as construction, engineering, steel, and construction equipment will see only moderate buoyancy. Demand in real estate remains weak and refinancing risks also cloud the overall outlook. And competitive pressure is unlikely to ease for telecom operators with the newest entrant expanding into more segments.


Among export-linked sectors, weak demand and constrained credit access will be a drag on the gems & jewellery sector, even as pharmaceuticals (especially bulk drugs and shrimp segments), will continue to benefit over the near-to-medium term from global capacity and supply constraints.


Exports performance in fiscal 2020 will also be a function of how Brexit pans out and the US slows.


In the financial sector, non-performing assets in banking are set to decline with fewer fresh slippages. Infusion of capital, emergence of public sector banks out of the Prompt Corrective Action framework, and sharper focus on retail credit will help banks move into a higher growth trajectory.


The liquidity squeeze in H2 following default by a large non-bank (not rated by CRISIL) has hampered the near-term outlook for select non-banks, even as most others have already reoriented their resource profiles by reducing reliance on short-term borrowings and focusing on asset-liability maturity management. Growth for non-banks will be lower than that seen before September 2018 as they seek to conserve liquidity.


The role of quality in credit assessments and ratings becomes even more critical as the environment turns cautious from a credit outlook point of view. Therefore, it is imperative that lenders and investors focus on quality metrics as they differ across providers. CRISIL’s default and stability rates have remained rock-solid in this environment, and are a testimony to our analytical rigour and proactive surveillance.


1 The debt of telecom firms does not include the liability to the Government of India towards spectrum charges