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After two years of intense rating downgrades, rating agencies CRISIL and Icra expect a gradual improvement in corporate credit ratings in 2014-15, owing to easing asset quality pressures and an economic recovery.
In 2013-14, CRISIL had downgraded 1,165 firms and upgraded 921. The agency said about 90 per cent of the downgrades was on account of slowing demand, tight liquidity, and stretched working capital cycles.
While a significant recovery is unlikely, the intensity of downgrades will be less in 2014-15. Naresh Takkar, managing director and chief executive of Icra, said there could be reversal in the trend (rise in upgrades and less downgrades) in the second or the third quarter.
Icra said in 2013-14, downgrades continued to exceed upgrades for the third consecutive year, with 602 downgrades and 559 upgrades. However, downgrades, as percentage of opening issuers, fell to 9.6 per cent in 2013-14, after having peaked at 20.3 per cent in 2011-12.
Companies in investment-linked sectors such as power, construction, engineering and capital goods, and transport saw more downgrades compared to firms in other sectors. About a third of the upgrades were due to company-specific factors such as a sustained track record of timely debt servicing and stronger-than-expected capital structure. Another third of the upgrades were driven by improved business conditions for companies in sectors such as packaged foods, textiles and agricultural products, which were linked to exports, agriculture and non-discretionary consumer segments.
Better days in FY15
Any significant improvement in credit quality is possible only if there is a strong and sustained recovery in demand. Liquidity, the monsoon, the outcome of the coming general elections and success in deleveraging balance sheets through sale of assets will be the key factors in 2014-15.
ICRA said considering the high intensity of rating downgrades during 2011-2014, some improvement in rating action was expected through 2014-15. Most sectors reporting high inverse credit ratios in the last few years---infrastructure (especially power), building materials, engineering, auto and auto ancillaries, hotels, sugar and textiles---were likely to see moderation, both in the number and the severity of rating downgrades, ICRA said.
Some highly-leveraged entities were trying to monetise assets. Now, these entities were more cautious while bidding for new projects and this was a positive on the credit front, ICRA said.
CRISIL believes 2014-15 will bring some respite to Indian companies. Corporate credit quality appeared to be on the road to improvement, with the economy likely to grow six per cent, against sub-five per cent growth in last two years, the agency said.
However, the improvement will be restricted to companies in sectors that were less capital-intensive, it said, adding profitability would see marginal growth due to stable commodity prices and improved capacity utilisation.
Nevertheless, in 2014-15, credit quality trends would be far from buoyant, given the slow economic growth and high interest rates. Downgrades will continue to outnumber downgrades in the near term.
