Corporate credit rating upgrades continue to outweigh downgrades

India's economy has witnessed strong economic growth over the past year, even as global headwinds like geopolitical tensions and high interest rates have clouded the global growth outlook. A strong domestic demand has boosted several sectors like automobiles, auto components, hospitality and real estate. This is reflected in the credit quality of corporate India, where ratings upgrades (the number of entities upgraded as a percentage of the total number of entities rated by an agency) continue to outnumber downgrades.

In the 2023-24 financial year, for every entity downgraded, ICRA upgraded two entities, the ratings agency said on Monday.

"Corporate India has shown a high resilience to withstanding the rise in borrowing costs over the past two years and is seen to have the capacity to bear the current level of interest rates, before the rate cut cycle likely begins in the latter part of the year. The asset quality of banks and NBFCs has also been at its decadal best with the profitability and the capitalisation indicators expected to remain healthy in the near term," noted K. Ravichandran, chief rating officer at ICRA.

India's GDP growth is likely to remain strong in 2024-25 financial year that began on April 1 (ICRA expects 6.5 per cent growth), and commodity prices, expected to remain stable, should support the credit profiles, the ratings agency added.

A similar positive trend can be seen at other credit ratings agencies too. India Ratings and Research upgraded the credit ratings of 312 issuers, while downgrading ratings of 114 issuers. Elsewhere, at CRISIL, there were 409 upgrades to 228 downgrades, in the second half of the last financial year.

"The three key pillars of India Inc’s credit quality deleveraged balance sheets, sustained domestic demand and government-led capex — kept the upgrade rate elevated in the second half of fiscal 2024. That is above the 10-year average for the sixth consecutive half year," pointed Gurpreet Chhatwal, MD, CRISIL Ratings.

The rate of credit rating reaffirmations has also remained steady at around 80-81 per cent. Furthermore, as credit profiles have improved credit defaults have continued to come down. According to ICRA, there were just five defaults in 2023-24, compared with 22 in FY23. Similarly, India Ratings noted defaults remained low at 0.9 per cent.

"The continued improvement in credit profiles can be attributed to similar reasons seen in FY23 - deleveraged balance sheets, sound domestic consumption demand, especially in the premium segment; and the government’s continued focus on capex spending. All of this summed up in India’s growth story, as reflected in healthy GDP growth estimated at 7.3 per cent for FY24, following an equally strong 7.2 per cent in FY23," according to Arvind Rao, senior director, head of credit policy group at India Ratings.

The government's continued thrust on investments has lifted sectors like infrastructure and capital goods, and these sectors have seen high number of upgrades, noted India Ratings. Upgrades were also seen in investment, consumption and service sectors.

Several sectors like automobiles, aviation, hospitality and banks have seen strong demand, and these industry tailwinds fuelled ratings upgrades there. Better-than-expected pre-sales and healthy occupancy levels, especially in the premium segment, have also supported residential real estate players.

Elsewhere, fresh equity infusions, which helped strengthen balance sheets, strong order books, expansion in market share among other things aided in ratings upgrades of several companies over the last financial year.

"With balance sheets in most sectors at their healthiest, capacity utilisation around peak levels and expected interest rate cuts, a broad-based pick up in private capex is finally in sight," said Chhatwal of CRISIL.

Financial services sector, information technology and services sectors largely sustained their credit profiles last year.

"Looking ahead, the macroeconomic conditions in India appear promising which along with relatively stable commodity prices would be supportive of the credit profiles," ICRA said.

But, even amid the buoyancy, there are headwinds visible for several sectors. For instance, textile companies were impacted by low demand in key global markets, as well as inability to pass on volatile raw material prices. Textiles was the only sector that saw twice the number of credit rating downgrades than upgrades last year, according to India Ratings.

The fast-moving consumer goods sector too saw higher negative rating action as volatile raw material prices squeezed margins and elongated working capital cycles led to deterioration in financial metrics.

Chemicals, cut and polished diamonds and bulk tea are also likely to see continued headwinds playing a spoilsport.