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Indian Companies’ Credit Quality Strengthens in H1FY23; Three Times More Upgrades Than Downgrades


The credit quality of Indian companies continued to strengthen during April-September 2022, carrying on with the momentum set in motion since the beginning of FY2022. Instances of rating upgrades were over three times that of downgrades during the first half of 2022-23, according to a report by ICRA.

It added that with ICRA upgrading the ratings of 18 per cent of its portfolio entities in H1 FY2023 on an annualised basis (and prior to that an equally high 19 per cent in FY2022), the upgrade rate reflected a significant mark-up over the past five-year and the past 10-year average of 11 per cent.

“The upgrades in the just-concluded half fiscal were concentrated in a few sectors. Real estate, textiles, financials, engineering, construction and roads sectors constituted the upgrade leaderboard for H1 FY2023. These six sectors accounted for almost half of the total upgrades in H1 FY2023, while constituting one-third of ICRA’s rated portfolio,” said ICRA in its report.

It added that a predominant majority of upgrades in the real estate sector were those of entities that are engaged in the leasing of commercial office space or warehousing assets wherein project completions, healthy leasing activity, and/ or loan refinancing at more favourable terms improved their credit profiles. Also, many entities upgraded were backed by relatively stronger sponsors.

K Ravichandran, chief rating officer of ICRA, said, “We forecast India’s GDP to grow by 7.2 per cent in FY2023 as against 8.7 per cent in FY2022 and (-)6.6 per cent in FY2021 as the demand for contact-intensive services remains buoyant and a pick-up in private and government capital expenditure looks on the anvil.”

He, however, said a significant hardening of interest rates, however, is a risk factor that would impact discretionary spending, make debt less affordable, and restrain capex.

“Further, an escalation in geopolitical conflicts, a global recession, and global fund flows (inter-related, not distinct factors) would challenge India’s macroeconomic fundamentals, even if not as much in relation to the other economies. These factors, directly or indirectly, would have a bearing on the credit quality trendlines, looking ahead,” Ravichandran added.

In the textiles sector, ICRA upgraded the ratings of several branded apparel manufacturers/ retailers as their business swelled on the back of the tailwinds of formalization, including the shift in customer preferences towards branded wear. Also, select entities that are engaged in leather garment and woven apparel exports were upgraded as they experienced a strong overseas demand post the pandemic, according to the report.

In the financial sector, several small- to mid-sized NBFCs with a loan book ranging between Rs 500 crore to Rs 10,000 crore, showing a track record of consistent business growth while maintaining/ improving asset quality and capitalization metrics witnessed upgrades. The ratings of three banks were also upgraded as their earning profile were expected to sustain their improving trend with further improvement in their solvency/ capitalisation metrics seen through fresh equity capital mobilisation.

The credit profile of several engineering and construction sectors entities is seen to be benefiting from their healthy order books and steady execution pace, supporting upgrades. The order books of construction entities are benefitting from the public investment projects in irrigation, roads, water supply, underground tunnelling, and metro works.

The ratings of select construction entities were upgraded based on the increasing diversification of their order book, including orders for the construction of data centers, a sub-segment with a relatively lesser competitive intensity. Likewise, several entities were upgraded — which manufacture engineering items straddling across transformers, smart meters, solar modules, elevator guide rails, material handling systems, and non-automotive forgings — in view of their growing order book and manageable working capital intensity.

The rating downgrade rate at 5 per cent remained on a leash in H1 FY2023 (6 per cent in FY2022) in comparison with the past five-year average of 12 per cent and the past 10-year average of 9 per cent. The business rebound post the pandemic, limited capital expenditures and, hence, restrained fresh term borrowings, and organic reduction in the existing balance sheet debt kept the incremental downside credit risks low.

The reasons for downgrades were entity-specific, including delays faced in realising receivables, instances of inter-group transactions posing governance concerns, rising input costs with limited pricing power, besides the rise in project implementation risks for some.

If the instances of downgrades in H1 FY2023 were low, the occurrence of defaults was seen to be even lower. There were only five defaults in ICRA’s portfolio in the recent half-fiscal, compared with 42 in FY2022 and 44 in FY2021, with four out of the five defaults being from the non-investment grade.

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