India Inc's credit profile gets stronger during Covid-19 pandemic

But rating agencies warn that broad-based upturn not visible yet

The credit profile of Indian companies appeared to have strengthened as rating upgrades outpaced downgrades in the first half of financial year 2021-22 (H1FY22) despite the devastating second wave of Covid-19, according to rating agencies.
 
The upgrades were spread across sectors and the credit quality outlook was positive, signalling prospects for further improvement with rising economic activity. However, rating agencies cautioned that the underlying business fundamental metrics across most sectors are unlikely to exceed the pre-Covid levels in the near term. The traction seen in upgrades lately need not evoke a pigeon-holed conclusion of a broader upturn, said rating agency ICRA.
 
CRISIL Ratings, meanwhile, saw its credit ratio (of upgrades to downgrades) increase further in the H1FY22, with 488 upgrades and 165 downgrades. This was the second consecutive rise in the credit ratio, at 2.96 times. It had risen to 1.33 times in H2FY21 from 0.54x in H1FY21.
 
ICRA upgraded the ratings of 303 entities, with only 163 downgrades in H1FY22. This was a marked improvement over the torrent of downgrades in the past (483 in FY21, and 584 in FY20).
 
“We are past the period of heightened economic uncertainty and the excessive pressures seen on the business and the financial risk profiles of entities,” it said.
 
India Ratings upgraded 150 issuers, while downgrading only 49 issuers. This was in stark contrast to the trend witnessed in the past two years, when downgrades far exceeded upgrades. The corporate downgrade to upgrade ratio (D-U ratio) was at a low of 0.3 in H1FY22 (2.1 in H1FY21, and 1.4 FY21).

 Suparna Banerji, associate director, India Ratings, said: “Fears of an uneven sectoral recovery have largely been dissipated. Positive rating actions were seen largely across sectors, indicating a broader economic recovery. In a sharp contrast, last year’s positive rating actions were limited to a handful of sectors.”
 
Explaining the wider spread of upgrades, Gurpreet Chhatwal, managing director, CRISIL Ratings, said infrastructure-linked sectors, such as roads, renewable energy, and construction and engineering, continue to benefit from government spending. They are experiencing strong order books and improving pace of execution.
 
The services sector, too, is finally turning the corner after a debilitating FY21. Its credit ratio rose to above 1 for the first time since the pandemic’s outbreak, on the back of select sectors, CRISIL said.
 
As for downgrades, contact-intensive sectors continued to face credit pressures with ICRA, having downgraded several entities in the hospitality and the aviation sector in H1FY22. The power, real estate, and textiles sectors too were large contributors to downgrades in the past six months.
 
Banks and non-banking financial companies (NBFCs) are expected to see asset quality pressures to rise over the course of FY22 from the retail and the micro, small and medium enterprises (MSME) segments, ICRA said.