Credit quality pressures to ease for India Inc: CRISIL

Corporate India’s credit quality trends will improve marginally in 2013-14, with demand pressures easing, commodity prices cooling-off, and interest rates declining during the year, says CRISIL Ratings.

Stretched working capital cycles to restrict material improvement

Credit quality constraints on corporate India appear to have bottomed out with the credit ratio (ratio of upgrades to downgrades) at 0.62 times in the second half (H2) of 2012-13. This is consistent with what we have highlighted in our previous release in October 2012. The pace of decline in credit ratio has moderated: the ratio has been largely stable in H2 2012-13, unlike in the first half (H1) 2012-13, when it declined sharply to 0.66 from 0.91 in H2 2011-12. The default rate has also been largely stable in both halves of 2012-13. CRISIL believes that corporate India’s credit quality trends will improve marginally in 2013-14, with demand pressures easing, commodity prices cooling-off, and interest rates declining during the year. Rating downgrades may, nevertheless, continue to outnumber upgrades over the medium term, given that companies’ stretched working capital cycles are unlikely to improve any time soon.

Downgrades have continued to outnumber upgrades in H2 2012-13-with 616 downgrades as against 379 upgrades. The downgrades were driven largely by slowdown in demand and tight liquidity, resulting from stretched working capital cycles. Companies in the textile, power, construction, and engineering and capital goods sectors accounted for a third of the downgrades. On the other hand, the rating upgrades were supported by improved business performance following stabilisation of recent capacity expansions and discipline in debt servicing; sectors that have had the highest upgrades are the pharmaceutical and packaged foods industries.

Says Mr. Ramraj Pai, President, CRISIL Ratings, "The credit quality cycle is expected to turn for the better, very gradually. In 2013-14, we expect a further reduction in repo rate, a part of which banks are likely to pass on to corporate India. Our analysis on CRISIL’s rated portfolio reveals that corporate India’s aggregate interest coverage ratio will improve to 4.0 times in 2013-14 from 3.7 times in 2012-13. Also, companies with an interest coverage ratio of 2.5 times or higher are expected to increase to 49 per cent from 38 per cent of the portfolio."

CRISIL’s analysis indicates that in the first half of 2012-13, the overall working capital cycle, however, increased by more than 30 days for nearly a third of the listed non-financial companies, which have published their results. Given the tightening in systemic liquidity since November 2012, material improvement in these companies’ liquidity would have been unlikely in H2 2012-13.

Says Mr. Pawan Agrawal, Senior Director, CRISIL Ratings, "We are likely to see two distinct trends. Some companies have managed the slowdown well by conserving liquidity and by being prudent in their capital expenditure plans. Such companies which also operate in less capital-intensive industries will continue to witness improvement in credit quality. On the other hand, players in sectors such as textiles, power, and construction, which have longer working capital cycles and stretched balance-sheets, will remain vulnerable. Sizeable equity infusion in such companies is critical for improvement in credit quality. Demand revival also remains a key element to be monitored."

Disclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Press Release.

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