The pressure on Indian companies? credit quality has eased a little in the current financial year after reaching its peak in the second half of 2008-09. Improved access to funds at reasonable rates has helped, as has an increase in profitability over the past two quarters.
In the four months up to July 2009, Crisil upgraded ratings on 13 entities and downgraded those on 90. In contrast, for the six months ended March 31, 2009, 81 ratings were downgraded and only one was upgraded. This indicates that although the pressure on credit quality continues, its intensity has abated.
In October 2008, Crisil had identified access to funds as one of the key monitorables for corporate credit quality. Since April 2009, Indian companies? access to funds has improved considerably, largely driving the ease in credit quality pressure.
Referring to the credit off-take of the Indian banking system, Crisil said that since commodity prices have come down drastically from its peak during a few months before, the inventory accumulation by the companies has gone down. Thus, working capital requirement of the companies has gone down as well. Also, the interest expenses of the companies have fallen in the last six months.
According to Raman Uberoi, senior director, Crisil Ratings, ?Companies have benefitted from the accommodative stance of the monetary policy, an increased appetite for risk in international capital markets, and an improved sentiment in the Indian equity market.?
Companies? interest burden has reduced: the total interest expenses for 403 non-financial companies in the S&P CNX 500 index dropped by 5% in the March 2009 quarter, and by another 12% in the next quarter, compared with the respective preceding quarters. This was driven by three factors: firstly, interest rates have eased even as working capital requirements reduced with commodity prices.
Secondly, Indian companies? borrowings in the global markets in June 2009 were the highest in any month since September 2008; these borrowings are cheaper than rupee-denominated loans. Thirdly, the improvement in equity market valuations afforded companies with stretched balance sheets some relief in the form of institutional placements and preferential allotments.
Moreover, for the quarter ended June 30, 2009, the profit performance of corporate India, as represented by 403 non-financial companies that form part of the S&P CNX 500 index, has improved. These companies? profitability hit a low in the quarter to December 2008, following the July 2008 peak in commodity prices, and an increase in funding costs triggered by the 2008 credit squeeze. However, corporate profitability bounced back after January 2009 because of lower commodity prices and funding costs. In the June 2009 quarter, it increased to levels last seen in 2007-08.
?Though these gains may not last in the event of continued demand sluggishness, the resulting erosion of profits is likely to be controlled and perhaps gradual,? added Uberoi.
Increased profitability and the easing in the debt service burden have led to better debt protection measures, but the pressure on credit quality persists: 14 Crisil-rated companies defaulted in the four months ended July 31, 2009, as compared with 12 in the preceding six months.
According to Ajay Dwivedi, director, Crisil Ratings, ?The easing of credit pressure does not mean a return of credit strength. Downgrades are likely to outnumber upgrades by a wide margin in 2009-10.
?Defaults are likely to continue; they may even accelerate as the pressure on credit quality forces weak companies to default. Moreover, the credit profiles of Indian companies remain vulnerable to demand uncertainty. This is especially true for companies that earn significant revenues from rural markets, which are exposed to the effect of drought this year. Corporate credit profiles are also vulnerable to interest rate increases and exchange rate uncertainty, the other key monitorables identified by Crisil,? he said.
Crisil estimates the GDP to grow at 6-6.5%. However, the rating agency might review its GDP stance in first week of September taking into account the drought like situation in the country.