The CRISIL Ratings credit ratio¹ (upgrades to downgrades) increased to 5.04 times in the second half (H2) of fiscal 2022, compared with 2.96 times in the first half (H1), underscoring continuing improvement in the performance of India Inc.

In all, there were 569 upgrades and 113 downgrades in H2.

The upgrade rate increased to 15.4% in H2 from 12.5% in H1, while the downgrade rate declined to 3.1% from 4.2% in the same period². The downgrade rate is less than half the ~6.5% average seen in the past ten half-year periods.

The performance comes on the back of a sustained improvement in demand (that lifted the revenues of most sectors to their pre-pandemic levels), secular deleveraging by debt issuers (seen over the past few fiscals and through the pandemic), and proactive relief measures by the government (that cushioned the pandemic blow).

CRISIL Ratings’ outlook on credit quality remains ‘positive’, with upgrades expected to outnumber downgrades in fiscal 2023, too. However, going forward, the credit ratio could moderate for two reasons: one, demand and profitability could soften if commodity prices remain high; and two, winding back of Covid-19 relief measures. Further, with offices reopening and business travel restarting, some of the cost savings of 2020-22 would be eliminated.

Demand recovery, nimbleness in managing supply chains, and a tight leash on costs have shored up the median operating profit growth of the upgraded companies by ~41% in the past two fiscals — more than double the rate for the portfolio. The rated companies have continued to deleverage, as underscored by the median gearing, which is estimated to have declined to ~0.55 time as of end-fiscal 2022, compared with nearly 1 time five years back.

CRISIL Ratings conducted a study based on its ‘Corporate Credit Health Framework’, which analyses the credit quality outlook of the top 40 sectors (by revenue), accounting for over 70% of its rated debt (excluding the financial sector). This framework looks at the strength of balance sheet, improvement in operating cash flows in fiscal 2023 over fiscal 2022, and vulnerability to the Russia-Ukraine conflict.

¹ Excludes rating actions involving ratings with the Issuer Not Cooperating (INC) suffix
² Upgrade or downgrade rate refers to the ratio of upgrades or downgrades respectively during the period to total outstanding portfolio at the beginning of the period on an annualised basis