Crisil says H1 recovery due to steel sops but H2 looks hazy

It said the ratio of downgraded debt to upgrades has moved beyond one for the first time in five years to 1.92

There has been a sharp decline in the quantum of downgraded debt in the first half of the current financial year (FY) thanks to the relief the metals sector got from the government, says ratings agency Crisil.

The agency, however, also said that it cannot be termed a recovery in credit quality as more numbers are needed to establish that it is sustainable.

The agency, which rates over 14,000 companies, upgraded debt worth Rs 72,000 crore during the period as against Rs 65,000 crore in the year-ago period, while the downgrades came down to Rs 38,000 crore from the Rs 2.4 trillion a year ago.

"Last year, the downgrades were high due to problems in the metals space, which accounted for 90 per cent of the debt overhang," Crisil president for ratings Pawan Agarwal told reporters in a concall on Monday. But he was qucik to add that he expects the downgrades to increase from here.

He further said the ratio of downgraded debt to upgrades has moved beyond one for the first time in five years to 1.92, which seems to be "giving a buoyant conclusion" but the number will "normalise" sooner than later.

During the past five years, the average has been 0.5-0.6 when it comes to the debt-weighted credit ratio, he said, adding, "sustainability of the current credit ratio is the key going forward."

Agarwal, however, feels that the number will still be over 1 for the remaining period of the current FY.

The report said revival of the sluggish investment cycle, deleveraging of corporate balancesheets, transmission of interest rates by banks and the pace of reforms will be the key monitoring factors for it to conclude that the recovery is sustainable.

There were 646 upgrades to 553 downgrades during the period, he said, but added that there is nothing new from the past patterns.

Agarwal said companies in consumption sectors like auto ancillaries and packaging, along with pharmaceuticals led the upgrades chart, while construction and realty were among those who saw donwgrades.

The donwgrades were primarily due to factors like weak demand and elongated working capital cycles, he said, adding 70 per cent of them were BB or lower rated.

High-intensity actions in the better-rated companies of A and above were very low, with 95 per cent of the rating calls being of a single notch, the agency said.

The agency also said the better credit ratios will not translate into good days for the NPA-saddled banks, saying it expects bad assets to continue to remain elevated at 8.5 per cent even in the March quarter.