The credit quality of India's corporates seems to have improved further in the first half of the current financial year ending March 2018, as companies spent less on debt-funded capital expenditure and interest rates declined. However, some concerns remain as investment demand remains weak and several sectors like real estate, capital goods and telecom continue to reel under pressure.
Data released by ratings agency Crisil indicates ratings upgrades outnumbered downgrades in April-September. Its credit ratio (upgrades versus downgrades) improved to 1.88 times in the first half of 2017-18, versus 1.22 times in the last financial year. The debt-weighted credit ratio (debt on companies books upgraded versus downgraded) jumped to 3.19 times in the first half, versus 0.88 times in 2016-17.
Pawan Agrawal, chief analytical officer at Crisil said that it was for the first time in five years that both the ratios were above one on a rolling 12 months basis. Between April and September, there were 817 upgrades, compared with 434 downgrades.
Crisil covered over 12,600 companies as of September 30.
However, the improvement in credit metrics has been largely aided by companies themselves not spending significantly on fresh capital expenditure as there is still enough capacity in the market and demand hasn't picked up meaningfully.
“The improvement has come about primarily because of better financial indicators as corporates kept away from capital expenditure given the output gap—or substantial headroom in capacity utilisation – in many sectors,” said Agrawal in a conference call with reporters.
Also, post demonetisation, interest rates fell further, as the pace of transmission of RBI's rate cuts was seen at a faster clip in the banking as well as the corporate bond market, which have helped.
Crisil analysts expect capacity utilisation to remain low for some time and a pick up is only expected next year, as overall demand picks up.
Pain points also remain in sections. For instance, small and mid size firms are likely to see continued cash flow pressures amid their transition to the Goods and Service Tax regime. Similarly, investment-linked sectors like capital goods and real estate are also facing headwinds. Various other reports have also pointed out earlier that residential real estate demand as well as sales have taken a hit in the wake of demonetisation and the implementation of Real Estate Regulations Act.
In telecom, Crisil expects further consolidation, with increasing pressure on smaller companies with stretched balance sheets and four large players dominating the industry in the future.
Also, high level of stressed assets in the economy remain a concern, said Somasekar Vemuri, senior director at Crisil. The agency estimates stressed assets to be around Rs 11.5 lakh crore or 14 per cent of total advances as of March 31, 2017.
“The credit quality of India Inc is a tale of two distinct loan books. The good one is where we have been seeing improvements over the past year, and which should sustain. The bad one is where there are sizeable stressed assets,” added Vemuri.
Insolvency and bankruptcy proceedings have been initiated against several large non-performing assets and many of these cases are ongoing in various benches of the National Company Law Tribunal. Progress on the resolution of these stressed assets will have to be closely monitored, officials at Crisil said.