Over the last year, sectors like banking, hospitality, real estate, infrastructure and automobiles have seen strong growth, which is reflected in the improving credit quality of corporate India. Data released by various credit ratings agencies shows rating upgrades continued to outnumber downgrades in the first half of the current financial year, although the rate of upgrades is beginning to slow.
According to CRISIL Ratings, there were 443 upgrades and 232 downgrades. The upgrade rate in the April-September period declined to 12.70 per cent from 13.46 per cent in the preceding quarter. However, it was still above the decadal average of 10 per cent, it said.
India Ratings and Research has upgraded the ratings of 146 issuers, while there were 55 issuer downgrades. Its corporate downgrade-to-upgrade ratio remained low at 0.38, although that has also picked up from 0.26 in the 2022-23 financial year.
At ICRA, the upgrade rate of investment grade ratings moderated to 15 per cent in the first half, below its 10-year average of 16 per cent. But, the downgrade rate at 6 per cent too remained well below the 10-year average of 8 per cent.
"In relation to the global economic conditions, India is currently an island of relative calm," said K. Ravichandran, chief rating officer at ICRA.
"Continued resilience in demand, early signs of an uptick in private capex, besides a supportive policy environment augur well for India’s economic activity. That said, the lagged effects of the domestic monetary tightening on borrowing costs, the spillover effects of the narrowing spread between the US Treasury and the G-Sec yields, besides the prevailing weakness in external demand are some of the foreseeable risks to the credit quality of India Inc.," he said.
Sectors aligned to the domestic story, such as automobile manufacturers and ancillaries, dairy, fast-moving consumer goods, renewable power, primary steel, capital goods, cement and hospitality are among the sectors with positive credit quality outlooks.
“Infrastructure and linked sectors accounted for around 29 per cent of the upgrades in the first half. To be sure, infrastructure has benefited not just from high budgetary allocation, but also from better risk sharing among stakeholders and acceptance of investment vehicles such as InvITs, or infrastructure investment trusts," said Gurpreet Chhatwal, Managing Director, CRISIL Ratings.
Strong housing sales growth is driving the real estate sector, robust recovery in travel post-Covid-19 has given the hospitality sector a boost and healthy passenger vehicle demand is aiding auto components makers. A strong credit growth and a decline in non-performing assets have also given a boost to banks.
Premiumisation of consumption in sectors such as auto and auto components, realty and companies in consumer services helped them witness rating upgrades, said India Ratings.
"Macroeconomic conditions have been on a gradual mend, with no shock seen during the first six months of the year. The companies where the ratings were either upgraded or affirmed continued to benefit from the economic recovery arising from resilient domestic consumption (particularly premium segment), increased government capex spending and likely pick-up in rural demand following a near-normal monsoon — all signalling a healthy GDP growth estimate of 6.2 per cent for FY24," said Suparna Banerji, Associate Director at India Ratings.
But, there are headwinds too. ICRA, for instance, has downgraded the outlook to 'negative' from 'stable' for the telecom towers sector, chemicals and petrochemicals, and cut and polished diamonds industry.
Telecom tower companies are seeing an elongated gross receivable cycle, and basic chemicals and petrochemical firms are facing global demand pressures and oversupply situation, apart from challenges arising from dumping of produce in India by other manufacturers, especially China and USA, pointed ICRA.
"The outlook on the cut and polished diamonds sector appears glum with the sector expected to record a 22 per cent decline in exports (in US dollar terms) in FY2024, marred by weakness in consumption demand, substitution of part-consumption in favour of lab-grown diamonds, and the narrowing of the spread between polished and rough diamond prices because of sanctions on Russia, a key global supplier of rough diamonds," it said.
Looking ahead for the rest of the financial year, upgrades are expected to outnumber downgrades say ratings agencies, but downside risks have gone up as inflation remains high and global central banks continue to remain hawkish on interest rates.
"While growth worldwide has been holding out, the impact of a likely global deceleration on export-oriented sectors needs watching. Closer home, erratic rainfall, high food and crude oil prices can stoke inflation and dampen demand, particularly in the rural and semi-urban markets," said Somasekhar Vemuri, Senior Director, CRISIL Ratings.
According to India Ratings, while the domestic market continues to be largely insulated from the global weakness, the upcoming private capex cycle, while necessary, may start impacting the credit profiles, given elevated interest rates and any demand disruptions arising on the other side of the capex. The continued ‘K-shaped’ recovery is delaying broad-based consumption demand and continues to be symptomatic of the subdued wage growth in the lower income bracket, it added.
