Downgrades intensity likely to abate as profit stabilises
CRISIL's rating actions in the first half (H1) of 2012-13 reflect increased pressure on corporate India's credit quality. CRISIL's credit ratio declined to 0.66 in H1 of 2012-13 from 0.91 in H2 of 2011-12, primarily on account of slowdown in economy.
October 04, 2012 / 16:33 IST
As profitability stabilises, intensity of downgrades likely to abate
Demand revival will be key for credit quality improvement
CRISIL's rating actions in the first half (H1) of 2012-13 (refers to financial year, April 1 to March 31) reflect increased pressure on corporate India's credit quality. CRISIL's credit ratio (ratio of upgrades to downgrades) declined to 0.66 in H1 of 2012-13 from 0.91 in H2 of 2011-12, primarily on account of slowdown in economy. However, with pressure on profitability and on economic growth showing signs of abating, CRISIL believes that the credit ratio has begun to bottom out. Material improvement in credit ratio will, however, take time and need substantial revival in demand. Over the near term, rating downgrades will continue to outnumber upgrades, although their severity and intensity may decline.Rating downgrades continued to exceed upgrades in H1 of 2012-13—there were 484 downgrades and 320 upgrades, on an expanded base of 10,542 ratings. The downgrades were driven largely by slowing demand and pressure on liquidity, because of stretched working capital cycles. Of the 484 downgrades, 183 were to 'default' category-these were primarily from rating categories ‘CRISIL BB' and lower, which are inherently more vulnerable to defaults. The rating upgrades, on the other hand, were supported by improved business performance due to stabilisation of past capital expenditure, and consequently, improved cash flows.Says Roopa Kudva, MD & CEO, CRISIL, "The end of a credit quality cycle is always an important juncture. We believe that point is now near. Having declined continuously for nine quarters, EBIDTA margins are now likely to increase. Also, the pressure on GDP growth seems to have eased. Together, these factors should ensure that the credit ratio does not decline materially from current levels".Corporate India's profitability appears to have bottomed out, primarily because of softening in commodity prices. Based on an analysis of the aggregate financials of 280 large companies across 28 key sectors, CRISIL estimates that EBIDTA margins will improve by 20 to 40 basis points in the quarter ended September 2012. GDP growth picked up marginally to 5.5 per cent in the quarter ended June 2012 from 5.3 per cent in the previous quarter. CRISIL expects GDP to grow at 5.5 per cent in 2012-13, and to improve further in 2013-14. Renewed confidence in growth will drive improvement in the working capital situation for corporates, and therefore, support credit quality.Says Ramraj Pai, President, CRISIL Ratings, "Around a third of the downgrades has been among the highly-indebted industries, including power, construction, engineering and capital goods, and textiles". The highest upgrade rates, on the other hand, were in the retail consumptionlinked sectors, such as packaged foods and home furnishing.The slew of recent policy reforms by the government has helped improve business sentiment. Adds Mr. Pai, "The key to significant upward movement in CRISIL's credit ratio is strong revival in demand as the economic environment improves over the long term. In the near term, we expect rating downgrades to continue to outnumber upgrades, although with reduced intensity."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.The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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