Credit quality of export, commodity-linked sectors to face pressure: Crisil

Rating upgrades outpace downgrades in H1FY24

While rating upgrades continue to outnumber the downgrades substantially due to robust domestic demand and government capital expenditure from April to September 2023, sluggish exports are beginning to add pressures to the credit quality of some Indian firms, Crisil Ratings indicates.

The rating agency said export-oriented sectors such as textiles (cotton spinning) and diamond polishing might experience a contraction in operating cash flows. Additionally, commodity-linked sectors grappling with supply-side gluts, like agrochemicals and specialty chemicals, are expected to witness a decline in credit quality, it added.

There were a total of 443 upgrades and 232 downgrades. The Crisil Ratings credit ratio – the proportion of rating upgrades to downgrades – moderated to 1.91 in the first half of this fiscal (H1Fy24) from 2.19 in the second half of last fiscal (H2Fy23), Crisil said in a statement.

The upgrade rate in H1Fy24 dipped marginally to 12.70 per cent compared with 13.46 per cent in H2Fy24. However, it continues to be above the decadal average of about 10 per cent.

The surge in upgrades was propelled by anticipated increases in cash flows this fiscal for sectors associated with domestic demand and those benefiting from increased government spending. These sectors, such as infrastructure, services and consumables, helped maintain the overall upgrade rate at an elevated level, it said.

Meanwhile, the overall downgrade rate rose to 6.65 per cent (from 6.14 per cent in the previous half), inching closer to the decade-long average of roughly 7.0 per cent. The downgrade rate saw an uptick in export-oriented sectors, although resilient balance sheets partially mitigated the impact of heightened overseas risks.

In Crisil Ratings’ assessment of 43 sectors based on their operating cash flow and balance sheet strength, 21 were categorised as having the most robust outlook for credit quality. This group includes sectors such as automobile manufacturing and ancillaries, dairy, fast-moving consumer goods, renewable power, primary steel, capital goods, cement and hospitality.

Of the 43 sectors, 16 exhibited strong to very strong balance sheets alongside moderate operating cash flow strength, resulting in credit quality outlooks ranging from positive to stable. These included segments of the infrastructure sector such as road assets, thermal power, construction and engineering, and real estate.

Lastly, six sectors are expected to face headwinds in terms of operating cash flows or balance sheet strength. Export-oriented and commodity-linked sectors in this category are likely to witness a dip in operating cash flows, although their balance sheets remain sound, Crisil Ratings added.