The credit quality of Indian corporate has improved during the first half of the current financial year owing to strong domestic demand, better cash flows and de-leveraging of balance sheets, according to separate analysis done by two rating agencies.
The credit ratio, a measure of the country’s overall creditworthiness that compares upgrades to downgrades, has improved to 5.52 times during H1FY23, compared with 5.04 times in H2FY22, Crisil said. The credit ratio, as calculated by Icra, has improved to 3.3 times in H1FY23 compared to 2.8 times in H1FY22.
“Around 35% of all upgrades were from the infrastructure sector. Infrastructure sector is in a unique position of largely being a domestic story and generally decoupled from the global headwinds,” Gurpreet Chhatwal, managing director of Crisil Ratings, said.
According to Icra, upgrades were concentrated in real estate, textiles, financials, engineering, construction and roadways, which accounted for almost half of the total upgrades. A total of 13 sectors, including hospitality, airport operators, industrials and marine ports, have seen most upgrades as these contact-intensive sectors have fared better and their cash flows are expected to grow over 10% in FY23, Crisil said.
However, export-oriented sectors such as textiles, pharmaceuticals and information technology are likely to see moderation in cash flows, Crisil said. Other sectors which might see lower credit ratio include agrochemicals, dairy and education services due to elevated costs and inability to fully pass them on, the agency said.
“Export-oriented sectors could see an impact on their cash flows as the ongoing slowdown in global demand would offset the benefits of a depreciated rupee and the diversified sourcing strategy of global companies,” Somasekhar Vemuri, senior director at Crisil Ratings, said.
“A significant hardening of interest rates, however, is a risk factor that would impact discretionary spending and restrain capex. Further, an escalation in geopolitical conflicts, a global recession and global fund flows would challenge India’s macroeconomic fundamentals, even if not as much in relation to the other economies,” K Ravichandran, chief rating officer at ICRA, said.
Downgrades were on the lower side with the reasons being entity-specific, including delays in recovering receivables, inter-group transactions posing governance concerns, rising input costs and project implementation risks, Icra said. At five, the occurrence of defaults was lower in H1FY23, compared with 42 in FY22, with four out of the five defaults being from the non-investment grade, the rating agency said.
In the financial sector space, the bank credit growth is seen at 14-15% in FY23, compared to 12% a year ago, while gross non-performing assets is likely to improve to 5%. However, the ability of banks to raise deposits to fund the credit growth and slippages from restructured MSME portfolios will remain key monitorable, Crisil said.