Rating agencies differ on credit quality outlook for 2013-14

CRISIL says credit quality pressure to ease but Icra believes it will continue unabated

Two rating agencies have differed on the credit quality outlook for the corporate sector in 2013-14. While CRISIL said corporate India’s credit quality would improve marginally in 2013-14, Icra had a different take, saying the pressure on balance sheets would continue.

On the credit quality front, CRISIL, a unit of Standard & Poor’s (S&P) said with the demand pressure easing, commodity prices cooling off and interest rates declining during the year the credit quality pressure is likely to ease. In defence of its somewhat pessimistic view, Icra, an affiliate of Moody’s, said though government had initiated some reforms with a focus on fiscal prudence, the macro-economic environment continued to be challenging. It also said demand slowdown across sectors continued. Cost pressures and tight liquidity conditions, with no sign of a pick up in investment activity, would add to the pressure.

Icra said the global environment was still buffeted by uncertainty and, according to the agency, though core inflation is easing, consumer price index (retail inflation) continues to be high, squeezing the scope for monetary easing. The Reserve Bank of India, in its last mid-quarter policy, had said “the scope for further rate cuts was quite limited”

Icra also underlined high current account deficit which clocked a record high figure of 6.7 per cent in Q3 and agency said unsustainable CAD can be expected in Q4 also.

While they differ on outlook, they are on the same page in terms of number of downgrades. CRISIL said rating downgrades might continue to outnumber upgrades in the medium term because of companies’ stretched working capital cycles, unlikely to improve in the near future. While Icra said “it does not expect a significant reduction in the pace of downgrades, though the intensity of downgrades is likely to have peaked in the second half of 2012-13.”

For CRISIL, the rated portfolio downgrades continue to outnumber upgrades. In the second half of the last fiscal (2012-13) there were 616 downgrades against 379 upgrades, with the credit ratio (ratio of upgrades to downgrades) at 0.62 in the second half of the financial year.

According to CRISIL, downgrades were driven by slowdown in demand and tight liquidity that resulted in stretched working capital cycles. It said, companies in textile, power, construction, and engineering and capital goods sectors accounted for a third of the downgrades. Sectors like pharmaceutical and packaged foods industries had the highest upgrades. This was due to improved business performance following stabilisation of capacity expansions and discipline in debt servicing.

According to Icra, stretched liquidity arising out of increased receivables and inventory was the key reason for the rating downgrades in the fourth quarter of 2012-13. Other factors for rating downgrades include demand slowdown in key markets, lack of visibility on future orders, increased commitment to weaker entities in the group, execution delays and debt-funded capital expenditure, Icra said.

CRISIL said credit quality constraints on corporate India appear to have bottomed out with the credit ratio of 0.62 as the pace of decline in credit ratio has moderated. In the first half of 2012-13, it declined sharply to 0.66 from 0.91 in H2 of 2011-12. The default rate has also been largely stable in both the halves of 2012-13.

According to Pawan Agrawal, senior director, CRISIL Ratings, “sectors such as textiles, power, and construction, having longer working capital cycles and stretched balance sheets, will remain vulnerable.” “Sizeable equity infusion in such companies is critical for improvement in credit quality,” he said.