Pace of downgrades likely to abate: Crisil Ratings

Even as the pace of downgrades continues to be far higher than that of upgrades, Ramraj Pai of Crisil Ratings believes that we are closer to the end of the downgrade cycle.

“The intensity of downgrades, we believe, is likely to abate though it will take time to turn and move upwards,” Pai said. Also Read: See Nifty at 6400, Sensex at 21K in 3-6 months: Daryl Guppy Pai pointed out that EBITDA margins are stabilizing. Furthermore, the first signs of some of the pressures on the GDP growth abating are in sight. “This makes us believe that even though the number looks like the credit ratio has really come down from 0.91 to 0.66, we believe we could be closer to the bottom than we have been over the last 12-18 months,” he added. Below is the verbatim transcript of the interview Q: There has been a lot of good cheer in terms of announcements, but you can feel the pulse on a company’s ability to payback its debt. What has been the experience in the last two months? Have the number of upgrades to downgrades increased or has the number of downgrades fallen? A: We have been on your show over the last 12-18 months talking about how the pace of upgrades has been significantly slower than the pace of downgrades, which is a reflection of the weakening economy, and in general, credit quality. As of now, the pace of downgrades continues to be higher than the pace of upgrades. We look at this from the credit ratio. Credit ratio, which was about 0.91 in the last half, in this half of April to September, has actually come down to 0.66. This means that the pace of downgrade continues to be high. But I must say that when we start looking at the data a little more granularly rather than just looking at it over a six month period, we believe that we could be somewhere closer to the end of the downgrade cycle. The intensity of downgrades, we believe, is likely to abate though it will take time to turn and move upwards. But we are seeing 2-3 things. We are seeing that EBITDA margins are stabilizing, and maybe, slightly improving a bit. We are also seeing the first signs of some of the pressures on the GDP growth abating. This makes us believe that even though at first cut, the number looks like the credit ratio has really come down from 0.91 to 0.66, we believe we could be closer to the bottom than we have been over the last 12-18 months. Q: Where exactly are you seeing the maximum amount of stress in terms of sectors? A: There are 3-4 key sectors. There is power, infrastructure, engineering construction, capital goods and textiles. These sectors, in total, may account for somewhere between 35-40 per cent of the downgrades that we have done. Q: Where is the stress declining since you are saying that granular data indicates that you are ending the stress? Which sectors would first bring the good news? A: If we really look at the sectors where upgrades are increasing, we are seeing more upgrades in some of the domestically focused sectors like packaged foods, home furnishings etc. So if I really use that as a proxy, I would say that some of the domestic sectors still continue to remain reasonably robust. Q: What sort of correlation or ripple effect would you see on banks at this point in time? A: As I said, this sort of analysis that we have done is forward looking. We will see the full impact of this over maybe the next 12 months. As of now, if you really look at the very short run, you may continue to see some pressure on banking sector asset quality whether it is in terms of the absolute NPA numbers or in terms of restructuring. On both these sides, I think we will expect short-term pressure. But definitely, things are looking a little bit better than they would have been three-six months earlier. Q: Is your short-term one quarter or two quarters? A: What we would want to say is in a year, things should definitely start looking better.