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Corporate default rate at 10-year high in FY12: Crisil

Downgrades stay ahead of upgrades in H2 on liquidity strain, weak demand

BS Reporter  |  Mumbai 

Indian corporate balance sheets will continue to be in the red in 2012-13. Rating defaults and downgrades will stay elevated due to high commodity prices and liquidity pressures including costly credit, according to rating agency Crisil.

The share of ratings with negative outlook in the total rating universe is six per cent, about double the share of rating with positive outlook. It is an indicator of financial health. The number of downgrades is also likely to stay ahead of upgrades in this financial year, said Pawan Agrawal director, corporate ratings, Crisil.

The rapid fall in the quality of balance sheets due to liquidity strain and weak demand, pushed the annual default rate for Indian companies to a 10-year high of 3.4 per cent in 2011-12. The annual default rate is the number of defaults in a year as a percentage of outstanding ratings at the beginning of the year (in April).

The default rate jumped to 2.7 per cent in 2009-10 from 0.7 per cent in 2008-09. It moved up to 2.9 per cent in 2010-11. Rating downgrades at 292 exceeded upgrades at 266 in October 2011-March 2012. This marks a reversal in trend from the first half of 2011-12, when upgrades at 313 were more than downgrades at 207, the rating agency said. Roopa Kudva, managing director and chief executive officer, Crisil, said: “Weak liquidity caused by elongation of working capital cycles is the primary reason for the defaults. This trend is likely to persist with slowing demand.”

Industries dependent on investment demand, like construction and engineering, and industrial machinery, have been affected by weak domestic demand, stretched working capital cycles and high interest rates.

Highly indebted industries — including textiles, steel, construction and engineering — accounted for a fourth of the defaults. Textile exports have been hampered by weak demand, especially in the euro zone. Steel manufacturers have had to contend with higher input prices.

The rating action ratio (RAR), an indicator of relative frequency of upgrades and downgrades, declined to 1.01 times in 2011-12 from 1.10 times in the previous year. The decline has been in line with Crisil’s expectations.

The rating agency expects RAR to decline further to less than 1 time in the near term. The credit quality of India’s firms will remain under pressure, given the slowdown in demand.

However, high operating rates, softening in commodity prices and flexibility to defer capital expenditure will help players offset profitability pressures, and tackle slackening in demand, it added.

First Published: Wed, April 04 2012. 00:56 IST