Credit ratio shows early signs of recovery, Crisil says

COIMBATORE: Corporate India’s credit quality is showing early signs of recovery, ratings agency Crisil has said.
Crisil’s credit ratio (ratio of number of upgrades to number of downgrades) stood at 1.64 times for the first half (H1) of 2014-15. Upgrades exceeded downgrades in H1 2014-15, with 741 upgrades as compared to 451 downgrades.
Firms with low debt exposure witnessed positive trends in credit quality.Despite the credit ratio exceeding 1, the ratio of the quantum of debt of the firms upgraded, to that of those downgraded (excluding financial sector players) remained weak at 0.59 times during the same period, reflecting continued pressure on systemic credit quality.
Crisil believes that the improvement in credit quality will be gradual and any significant recovery will be contingent to a sustainable increase in investment demand. The improvement in business-related factors was the key driver for 60% of the upgrades.
This is visible for export-linked sectors and non-discretionary consumer segments such as traders, packaged foods, pharmaceuticals, textiles and agricultural products, which continue to have the highest upgrade rates.
“Our analysis indicates that there is a sharp disparity in credit quality trends based on leverage, profitability, and liquidity,” said Ramraj Pai, president, Crisil Ratings. Firms with better profitability (return on capital employed [RoCE] exceeding 15%), witnessed three upgrades for every downgrade.
Among firms with low leverage (debt-to-earnings before interest, taxes, depreciation and amortisation [EBITDA] ratio below 2.5 times), more than three firms were upgraded for every downgrade in H1 2014-15. In contrast, weak liquidity, and pressure on profitability were key drivers for downgrades.
Firms with high leverage (debt-to-EBITDA above four times) were subject to significant credit quality pressures as evident from their credit ratio remaining below one during first half of 2014-15. Players operating in the construction, engineering and capital goods, and automobile ancillary sectors had higher downgrade rates than their counterparts in other sectors.
“Credit quality buoyancy in the overall economy is still some time away; for that to happen, investment demand, which depends on the extent to which the central government pushes big ticket policy reforms, needs to substantially increase,” said Pawan Agrawal, senior director, Crisil Ratings.
Crisil expects a gradual improvement in the credit ratio over the medium term, as economic growth records mild recovery from the lows of the two years through March 31, 2014.