India's Inc's credit quality recovery to be a bit slow in FY16: CRISIL

Mid-sized firms (turnover of Rs 100-500 cr) saw biggest gain in credit quality

The credit quality of Indian companies is expected to improve only gradually in this financial year. It will be restricted to those with lower leverage and healthy profitability, according to rating agency Crisil.

In a conference call, Crisil said the recovery in quality would be driven by a mild uptick in investment, improvement in the private consumption and favourable commodity prices.

Another rating agency, Icra, said the movement in interest rates and commodity prices would have a bearing on the credit profile of the corporate sector over the near term. Any meaningful pickup in investment activity and industrial capital expenditure would begin to show up only over the medium term.

Elaborating on the outlook for 2015-16 Somasekhar Vemuri, senior director, Crisil, said the recovery would be a bit slow in the FY16. The rating upgrades will continue to be more than downgrades.

Icra expected the trend of improving Credit Ratio (upgrades outnumbering downgrades) to continue in 2015-16. Some highly leveraged entities are beginning to monetise their assets. They are more cautious while bidding for new projects. This is positive from the credit perspective.

Credit ratio of India Inc continued recovery in the second half of 2014-15 but broad rebound was still a while away. Mid-sized firms (turnover of Rs 100-500 crore) saw the biggest gain in credit quality.

They have been able to manage working capital requirements better (kept it under good check).

Crisil said, overall, India Inc’s credit quality continued its slow recovery in 2014-15. The credit ratio is coming in at 1.75 in the second half — up marginally from 1.64 in the first half. When upgrades are more than downgrades, the credit ratio will be greater than one. There were 466 downgrades in the second half, of which almost 60 per cent were attributable to weak liquidity. Investment-linked sectors such as capital goods, construction, engineering, steel and real estate continued to log the highest downgrade rates.

Upgrades totalled 816, with almost two-thirds driven by business-related factors such as scaling-up of operations, better demand outlook and improved capacity utilisation. Export-linked sectors and non-discretionary consumer segments such as agricultural products, textiles and pharmaceuticals continued to see the highest upgrade rates, Crisil said.