India Inc’s credit quality woes may not be over yet

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New Delhi | Published: April 3, 2018 2:34:46 AM

Although the number of ratings upgrades has outpaced the number of downgrades, credit quality pressures on Indian companies may continue to persist.

India Inc, crisil, economyAccording to ratings agency Crisil, there were 1,402 upgrades as compared to 839 downgrades in fiscal 2018, taking the credit ratio to 1.67 times.

Although the number of ratings upgrades has outpaced the number of downgrades, credit quality pressures on Indian companies may continue to persist.

According to ratings agency Crisil, there were 1,402 upgrades as compared to 839 downgrades in fiscal 2018, taking the credit ratio to 1.67 times. However, including rating actions on non-cooperative borrowers, the credit ratio for FY2018 stood at just 0.74—considerably lower than the 1.67 times for cooperative issuers.

Similarly, Icra upgraded the ratings of 646 entities and downgraded that of 418 entities—with a credit ratio of 1.5—pointing to an improvement in the credit quality of a larger set of entities. Yet, the agency believes these trends do not imply that the credit quality pressures on Indian companies have subsided.

“When the above data is juxtaposed with the volume of debt that underwent a rating change and the number of notches by which the ratings shifted, a somewhat different portrayal emerges. The volume of the debt downgraded rose sharply to almost 3 lakh crore in FY2018, significantly higher than the debt of Rs 1.7 lakh crore, downgraded in the previous fiscal,” Icra said.

A number of well-known companies were downgraded in recent times. In February, CARE ratings downgraded the long term bank facilities (fund based) of Wockhardt to CARE A+ and downgraded its short-term bank facilities (non-fund based) to CARE A1.
At the same time, Crisil downgraded its rating on the long-term bank facility of Titagarh Wagons to ‘Crisil A/Stable’. The ratings agency said the downgrade reflects Crisil’s belief that the group’s operating performance will remain weaker-than-expected in the near-term, mainly considering the losses likely to be incurred on legacy orders in the overseas subsidiary.

In March, Icra downgraded the long-term rating for the Rs 250 crore non-convertible debenture programme, the Rs 105 crore fund-based limits and the Rs 195 crore term loans of Fortis Healthcare to [ICRA]BBB-. The short-term rating for Rs 600 crore commercial paper programme and `20 crore non-fund-based facilities were also revised to [ICRA]A3. Icra attributed the rating action to the uncertainty pertaining to the large advances extended by Fortis Healthcare to related parties and certain vendors, on which the company’s statutory auditor expressed its inability to give an opinion on recoverability.

Jitin Makkar, head of credit policy at Icra, points out that almost half the downgrades by Icra in FY18 were induced by the weakening business position of entities.

“Several engineering sector entities faced a slowdown in their domestic order book, while apparel manufacturers grappled with weaker demand from overseas customers. A number of real estate sector entities experienced delays in commissioning or stabilisation of projects, while several tea producers suffered from cost challenges…” he said.

Krishnan Sitaraman, senior director at CRISIL Ratings, said FY19 can be a defining year for banking. “Provisioning levels, though, will continue to be high, which would suppress overall profitability,” he said.

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