7 stocks will upgrade for 10 downgraded by CY13 end: CRISIL

According to Ramraj Pai, president, CRISIL Ratings the credit quality by the end of CY13 will be 0.75-0.85. This means that about 7-8 stocks will be upgraded to 10 stocks that are downgraded. The statement came after CRISIL's report that said that India Inc's credit quality pressures have bottomed out.

The rating agency says the credit ratio has stabilised at 0.62 times in the second half of FY13. And going forward, it expects India’s credit quality to improve marginally in FY14. Below is the edited transcript of Pai's interview to CNBC-TV18. Q: Take us through what were the details of your findings. Ten downgrades to 6 upgrades does not look like a very good figure, but why are you happy with that number?
A: Six upgrades to 10 downgrades definitely does not look like a happy figure. The figure  was 9 downgrades to 10 upgrades just about eight to nine months back. At that point in time, we said that it will come down to about 0.6 and remain there. What we are seeing is that the credit ratio, the ratio of upgrades to downgrades has actually stabilised. In the last half of the year, which is the first half of 2012-13, it was 0.66. It is now at emains at about 0.6 which is a marginal dip, but it is what gives us confidence.
The last three to four months, from 0.62 for the second half of the year 2012-13, it has actually started moving up to about 0.7. So, we are seeing initial positive signs. There definitely is a little bit of bottoming out on the credit cycle. This is on a fairly large base of about almost 10,000 odd companies. So, that gives us a pretty good sense of how things could move over the next couple of quarters. Q: You have indicated that textile, power, construction, engineering and capital goods accounted for most of the downgrades. Which sectors are you expecting a recovery then in FY14?
A: We will see some marginal recovery in several of these sectors. What we are really looking at, in terms of reasons for the recovery are firstly that we expect commodity prices to come off. This will help several of these sectors.
Secondly, we expect that there will be some reduction of interest rates. And thirdly, we expect some improvement in demand. Several of these sectors and mostly interest rate sensitives are very much connected to the economy. We believe we will see some improvement in the sectors though the pace of improvement maybe somewhat muted. Q: You have spoken about interest coverage ratio improving. Can you take us through some data, which gives you a feeling that fewer companies will find themselves unable to pay the interest?
A: We are assuming reduction of about 25 basis point (bps) on interest rates across the board, EBITDA margins improving by about 50 bps and a revenue growth of about 12-13 percent. We use this sensitivity analysis on our portfolio of about 10,000 companies and when we did this kind of analysis, we saw that there was a material improvement overall in the interest coverage ratio. Obviously, that is one of the factors. It is an important indicator to give us some perspective and we could definitely look at some improvement as we go deeper into 13-14. Q: Right now, 6 upgrades to 10 downgrades, perhaps in the next 12 months after you get this reduction in interest cost and some revival in demand. How do you expect the credit ratio to move?
A: If I may hazard a guess, till atleast the next couple of quarters, I don't anticipate that this is going to go anywhere above 1. The last I remember was December 2010, when we were at about 1.1. We are very far away from there. It will be a long slow climb, maybe 0.6. It is difficult to obviously hazard a guess on this, but we may move to maybe 0.75-0.8-0.85. We will be in that kind of a zone maybe by the end of the calendar year for sure and then we will have to see how lot of other things pan out.

Q: Should we therefore assume that you will be upgrading your rating of the banking sector in some fashion? Will it be across the board? Will it be pockets that will do well? Can you name some banks, which you think are showing faster improvement?
A: I am not at liberty to get into bank-specifics. What is important is while we will see a broad based improvement in credit quality, there are pockets of issues that will continue to impact the banking system. So, while things aren't getting worse, the road upwards is going to be fairly torturous and slow.
We aren't really looking at a material improvement in terms of bank asset quality. We feel that it may actually just about worsen. However, the momentum of the negativity that is already there in the system, it will continue for a while. Q: Will total bad assets be worse than 3.5 percent?
A: It may not increase very significantly, but we expect that there will be some increase from that number.