Crisil sees mild recovery in corporate credit profiles

Written by PTI | Mumbai | Updated: Apr 3 2014, 00:56am hrs
Crisil'While we see GDP clipping at 6 per cent, given our expectation of a stable government after polls and a normal monsoon, it could reverse if these do not materialise and GDP may grow at 5.2 per cent'
Credit rating agency Crisil has warned that though credit quality pressure on corporates has bottomed out, improvement will be gradual due to fragile economic recovery, even as it said profitability will be a tad better this fiscal.

The largest domestic rating agency also said that it expected GDP growth of 6 per cent this fiscal, which is 50 basis points above consensus estimate and also that of the RBI and Asian Development Bank (ADB) but warned that if monsoons fail due to an El Nino impact on rainfalls, economic expansion could slip to 5.2 per cent.

"While we see GDP clipping at 6 per cent, given our expectation of a stable government after polls and a normal monsoon, it could reverse if these do not materialise and GDP may grow at 5.2 per cent," Crisil told reporters on a conference call, addressed by senior ratings directors Pawan Agrawal and Somasekhar Vemuri, today.

During the just concluded fiscal, Crisil, which rates as many as 13,000 companies, has downgraded 1,165 firms and upgraded just 921.

"Companies credit quality is on course to a gradual recovery in FY15, as we believe the credit ratio (ratio of rating upgrades to downgrades) may recover from the low levels seen during the last fiscal as pressure on profitability and demand eases," Crisil said.

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"But the overall credit quality will be far from buoyant near-term, given the fragile economic growth and limited scope for cut in interest rates," they said about the ratings.

Around 90 per cent of downgrades were due to slowing demand, tight liquidity and stretched working capital cycles. Companies in capital intensive sectors like power, construction, engineering and capital goods, as well as transport, had more downgrades than firms in other sectors, it added.

Crisil said credit ratio, at 0.79 times in FY14, has remained weak for two years in a row, as downgrades outnumbered upgrades on slowing demand, tight liquidity and high interest rates.

However, moderation in downgrade intensity to 10.1 per cent from 12.1 per cent in FY13, has helped the credit ratio recover marginally from 0.62 times in the previous fiscal.

They also said more than a third of the upgrades were on account of company-specific factors like sustained track record of debt servicing and stronger-than-expected capital structure, while another third of the upgrades were driven by improved business conditions in sectors like packaged foods, textiles and agri products-that have linkages with exports, agriculture, and non-discretionary consumer segments.

"Our analysis indicates that firms with better profitability and low leverage have survived the downturn well," Crisil Ratings president Ramraj Pai said.

Companies with a return on capital employed (RoCE) of over 15 per cent, saw 58 per cent more upgrades than downgrades, he said, adding that upgrades outnumbered downgrades by 30 per cent for low-leveraged firms.

On its benign rating outlook, Crisil said that its corporate credit quality would improve as it expect GDP to touch six per cent this fiscal from below five per cent levels seen in the last two fiscals. The credit ratio will, however, remain below one time, near-term.

"Significant improvement in credit ratio is possible only if there is strong and sustainable recovery in investment as well as in consumption demand. Underlying assumptions for any improvement in credit quality are progressive policies and continuity in reforms," Agrawal said.

The degree of recovery, availability of liquidity, performance of the monsoons, continued recovery in exports, outcome of the general polls, and success in deleveraging the balance sheets through sale of assets will all be critical for the companies, Agrawal concluded.