Value of downgraded debt trebles to Rs 1.38 trn in H1 of FY20: Crisil

Jewellery, garments, construction bear brunt of downgrades as slowdown, sharp fall in consumption demand, slower govt spending weigh

Credit quality pressures intensified for India Inc in the first half of fiscal 2020, driven by factors like global and domestic economic slowdown, sharp fall in consumption demand, and slower government spending, according to rating agency Crisil.

The value of debt downgraded more than trebled to Rs 1.38 trillion in the first half of fiscal 2020 (ended September 2019) from Rs 39,000 crore in the first half of fiscal 2019. That’s the highest for any half since fiscal 2016, rating agency Crisil said in the review of rating action in April-September 2019.

Constrained access to funding affected the credit profiles of entities across sectors, especially non-banks and real estate.

Crisil's debt-weighted credit ratio (value of debt upgraded to downgraded) plunged to 0.25 time in the first half of fiscal 2020, compared with 1.65 times for fiscal 2019.

Somasekhar Vemuri, Senior Director, Crisil Ratings, said, “Entities with higher leverage saw more downgrades as pressure from the demand slump intensified. Declining profitability and stretch in working capital cycles also were reasons for the downgrades."

Those with lower leverage withstood the demand-side challenges better. Over the past five fiscals, the median gearing for Crisil-rated companies has improved from 1.3 times to 0.9 times. This reflected both, deleveraging that’s been underway and resilience to demand pressure. 

The fall in credit ratios was across investment-, export-, and domestic-consumption-linked sectors. Among investment-linked sectors, construction and allied accounted for over 30 per cent of downgrades because of delays in project execution and stretched liquidity.

Export-linked sectors reported a mixed performance, with pharmaceuticals (especially bulk drugs) continuing to benefit from supply constraints in China. Gems & jewellery and readymade garment exporters saw more downgrades because of constrained access to funding, lower export competitiveness, and weak demand.

On the outlook for balance part of Fy20, Gurpreet Chhatwal, President, Crisil Ratings, “We remain cautious about the credit outlook for the second half because demand pressures persist. 

Going forward, how well demand recovers after a good monsoon, the sharp cut in corporation tax, the faster and automated release of Goods and Services Tax refunds, and higher export incentives will be the key monitorable. he added.