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Pandemic to weigh on India Inc credit quality

Intensifying Covid-19 pandemic and a looming global recession have cast an unprecedented cloud over the credit quality outlook of India Inc, which has already been impacted by a slowing economy. This has forced CRISIL to slash its base-case GDP growth forecast for fiscal 2021 to 3.5%1.

The slowing economy is reflecting in rating actions with downgrades (469) outnumbering upgrades (360) in the second half of fiscal 2020, and CRISIL’s credit ratio falling to 0.77 time from 1.21 times in the first half.

Amid intensifying credit pressures, timely measures by the RBI to permit banks to offer moratorium on servicing of bank loans until May 2020 comes as a big breather in the immediate term. Over the near to medium term, however, credit quality trends would be driven by the resilience of companies in terms of bouncing back from the near-standstill demand situation.

We foresee India Inc’s credit quality deteriorating in the near term. Our study of 35 sectors, both from manufacturing and services, however, shows sharp variation in resilience in a post-Covid-19 landscape. While strong balance sheets or continuing demand will support some sectors during the current lockdown, a sharp pick-up in demand thereafter will help. However, some other sectors could be cramped by collapsing discretionary demand or high leverage.

These 35 sectors account for over 3,000 firms and over 71% of the debt (excluding financial sector) in CRISIL’s rated portfolio. The key conclusions of this study include:

• Nearly 44% of the debt is in sectors expected to be in the high-resilience category. These include pharmaceuticals, fertilisers, oil refineries, and power & gas distribution & transmission due to the essential nature of products and even government support in some. Telecom and fast-moving consumer goods (FMCG) will see the least demand impact and for some of their sub-segments may indeed benefit from demand uptick during the pandemic-driven disruption
• Nearly 52% of the debt is in sectors expected to be in medium-resilience category. These include automobile manufacturers, power generators, roads and construction. While these sectors have moderate-to-high disruption due to the lockdown, key mitigating factors that cushion the cash flows include the presence of strong balance sheets or liquidity or expected stronger recovery in demand
  
• Around 4% of the debt in sectors in the least-resilience category. These include airlines, gems & jewellery, auto dealers and real estate due to the discretionary nature of goods and services, and weak balance sheets
  

In the financial services segment, the lockdown restrictions will have a near-term impact on both collections and fresh loan disbursements.

While the RBI moratorium provides some relief on the assets side, it is on the liabilities side that challenges could emerge for non-banking financial companies (NBFCs) with high share of capital market borrowings. That’s because no moratorium has been announced so far for capital market borrowings (such as bonds and commercial paper) and unless investors expressly consent to restructure the instrument terms, repayments on these will have to be made on time, during a period when collections would be impacted significantly.

¹ See CRISIL press release dated March 26, 2020, titled ‘Slashing India’s growth by 170 bps’

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