Firms move up, credit quality falls

By: | Published: October 6, 2015 1:19 AM

Even as more companies are being upgraded, a Crisil study shows the credit quality of highly leveraged firms is worsening, reports fe Bureau in Mumbai.

Even as more companies are being upgraded, a Crisil study shows the credit quality of highly leveraged firms is worsening, reports fe Bureau in Mumbai. In the six months to September, the debt-weighted credit ratio for a set of 1,441 companies that witnessed a rating change fell to 0.27 times, the lowest in nearly three years. The gauge, which reflects the total debt of companies upgraded to that of those downgraded, stood at 0.62 times in March 2015.
The overall credit ratio — the number of firms upgraded to those downgraded — improved to 2.13 times in the first half of FY16 from 1.68 times in FY15; there were 981 upgrades to 460 downgrades.

Companies downgraded by Crisil have a total debt of Rs 2.4 lakh crore, of which 90% is on balance sheets of firms from investment-linked or commodity sectors.

Those companies with a debt to Ebitda ratio of more than 2.5 times were categorised as highly leveraged. Players in the real estate, infrastructure and metals sectors are in trouble while credit quality is improving for exporters and makers of consumption goods.

Crisil expects upgrades to continue to outpace downgrades though this may not translate into systemic buoyancy as elevated debt levels and a weaker investment outlook will continue to affect the debt-weighted credit ratio which the firm says may stay below 1 over the medium term.

“Firms in the metals, real estate and infrastructure space continue to face pressure because of high debt or a steep fall in product prices,” said Pawan Agrawal, chief analytical officer at Crisil.

“Leverage and the nature of demand turned out to be the two critical factors for the credit performance. Commodity-linked sectors faced pressure due to sharp fall in realisations and profitability,” added Somasekhar Vemuri, senior director, Crisil.

Vemuri noted that weak liquidity was responsible for 60% of downgrades including 44% of downgrades that were made to the “default” category. For those firms that have higher debt to Ebitda ratio more than 4 times, the debt-weighted credit ratio was just 0.15 times, indicating that for every Rs 100 of debt that was downgraded there was only Rs 15 worth of debt that was upgraded.

About two-thirds of upgrades were driven by better demand outlook for consumption-linked companies and better capacity utilisation. Debt-weighted credit ratio for firms from consumption-linked sectors stood at about 2.78 times.

These include firms from ready-made garments, pharma, packaging, packaged food items where both numerical credit ratio and debt weighted credit ratio came well in access of one times.

Crisil noted that investment which was expected to pick up is getting delayed. Also, companies are taking longer than expected for deleveraging their balance sheets. According to the rating agency, besides these two factors, a broad-based improvement in India Inc’s credit quality also hinges on commodity prices, extent of interest rate reduction and government’s ability to push economic reforms.

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