A sharp increase in downgrades was witnessed during the first quarter of the current financial year, with CARE downgrading ratings of 160 companies compared to 101 in the year-ago period. In percentage terms, downgrades contributed to 14% of total rating actions taken by CARE against 10% in Q1FY16. On the other hand, number of upgrades fell to 137 in the quarter under review against 165 during the corresponding quarter last year.
Nevertheless, the credit quality of Indian corporates registered a slight moderation during Q1FY17. According to a report compiled by CARE Ratings, the credit quality of companies is currently more stable than it was two years ago as the number of rating reaffirmations increased to 823 in the quarter ending June 2016, compared with 755 during Q1FY16. According to the report, the maximum number of downgrades were reported in the construction, iron & steel, chemical sectors. “Decline in margins & profitability, scale of operations, liquidity position, moderation in operational and financial position are some of the other factors that have prompted downgrades,” CARE said.
According to CARE, the modified credit ratio (MCR) fell to 0.98 in the quarter ended June 2016 – the least in three years. The MCR is defined as the ratio of upgrades and reaffirmations to downgrades and reaffirmations. An increase in the MCR implies an improving credit quality of rated entities while an MCR close to one indicates higher stability due to larger proportion of reaffirmations.
In the first six months of 2016, major credit rating agencies – S&P, Moody’s, CARE, ICRA, Fitch and CRISIL – downgraded the credit rating of as many as 938 firms, data compiled from Bloomberg showed. Of these, 264 firms earned themselves a ‘default’ tag. The companies which were downgraded to ‘default’ during the period include Gammon India, Rolta India and Shree Renuka Sugars.
A sector-wise analysis showed that the rating of 40 steel and allied companies was in trouble following the collapse of prices of the metal and cheap imports from China flooding the market. Steel Authority of India, Tata Steel and JSW Steel are among companies whose businesses were impacted.