The Crisil Ratings credit ratio¹ (upgrades vs downgrades) continues to be high — at 5.52 times in the first half of this fiscal (H1-FY23) — underscoring ongoing broad-based improvement in India Inc’s credit quality. The credit ratio was 5.04 times in the second half of last fiscal (H2-FY22).

The credit ratio is in line with the positive credit quality outlook Crisil Ratings had articulated earlier — that upgrades will far outnumber downgrades through this fiscal.

To be sure, ratings on nearly 80% of the Crisil Ratings portfolio was reaffirmed, or there was no change during H1-FY23. That compares well with the historical average of 83%.

For the rest of the portfolio, what has changed is the upgrade rate, which increased to 16.70%, while the downgrade rate was flattish at 3.02%. In all, there were 569 upgrades and 103 downgrades.

Three reasons stand out: 1) strengthening domestic demand, with the economy expected to grow 7.3% this fiscal; 2) higher realisations leading to better cash flows; and 3) continuation of debt-light balance sheets as capex remains low. The performance of upgraded companies improved significantly over the past three fiscals despite severe pandemic-related disruptions. This is reflected in the median expected growth in Ebitda² at a 3-year CAGR³ of 25% for the upgraded companies which is much better than the 12% expected for the rest of the portfolio.

Says Gurpreet Chhatwal, Managing Director, Crisil Ratings, “Around 35% of all upgrades were from the infrastructure sector (including large realty players). Infrastructure sector is in a unique position of largely being a domestic story and generally decoupled from the global headwinds. Here, upgrades were driven by improved operating cash flows, completion of crucial project milestones and equity infusion. Over the last few years increasing share of central counterparties in infra projects has led to more predictable payment cycles providing additional comfort to credit quality.”

The deleveraging trend has continued with median gearing of the Crisil Ratings portfolio expected to touch a decadal low of less than 0.5 time this fiscal. While capacity utilisation is on an improving trajectory backed by healthy offtake, private capex is not expected to pick up substantially in the near term. This has arrested the downgrade rate, despite some sectors facing challenges such as higher input costs and rising interest rates.

Strong balance sheets are expected to hold India Inc in good stead even though global uncertainties persist.

Crisil Ratings’ proprietary ‘Corporate Credit Health Framework’ analysed the operating cash-flow strength (measured by expected change in absolute Ebitda) and balance sheet strength of the top 43 sectors that account for over 70% of rated debt (excluding the financial sector) in fiscal 2023 over fiscal 2022.

The framework was conceptualised to give shape to our credit quality outlook on various sectors. Notably, sectors which were classified under ‘the most buoyant bucket’ in the first edition of this study in April 2022, including pharmaceuticals, specialty chemicals, hospitals, and education services, saw the highest credit ratio in H1-FY23.

Key takeaways from the H1-FY23 study:

• 13 sectors, accounting for 18% of rated debt, are in the most buoyant bucket with robust balance sheets. Their operating cash flows are expected to grow over 10% in fiscal 2023 on-year which is higher than other sectors. These include sectors expected to turn around after dismal pandemic years — hospitality, airport operators, industrials, and marine ports. They moved into this bucket driven by better operating cash flows
• The balance 30 sectors would log favourable trends in one of the two parameters — operating profits or leverage — and hence their credit quality outlook would be between positive and neutral. These include some of the infrastructure sectors such as highway tolling and renewables which will see steady growth in operating cash flows while balance sheet remains healthy
• Export-oriented sectors such as textiles, pharmaceuticals, and information technology would see a moderation in cash flows vis-a-vis earlier expectations due to slowdown in demand from end-user markets. Sectors such as agrochemicals, dairy, education services would also see a moderation in their performance due to elevated costs and inability to fully pass them on.

The financial sector’s credit quality outlook is seen stable, with bank credit growth seen up 14-15% this fiscal versus 12% last fiscal, while for non-banks⁴, credit growth is expected at 11-12% versus 6-8% last fiscal.

As for asset quality, gross non-performing assets (GNPA) of banks is likely to improve 90 basis points (bps) on-year to 5% this fiscal, riding on post-pandemic recovery and higher credit growth. For non-banks, the GNPAs are expected to be ~3% as on March 31, 2023, versus 3.5% as on March 31, 2022. A key monitorable would be the performance of restructured portfolios, especially MSME⁵.

Says Somasekhar Vemuri, Senior Director, Crisil Ratings, “Our credit quality outlook on India Inc remains positive led by resilient domestic demand and impetus from the government’s infrastructure spends. However, persistent high inflation, hike in interest rates, and slowdown in large economies remain a risk to our outlook and may result in moderation of credit ratio. Export-oriented sectors could see an impact on their cashflows as the ongoing slowdown in global demand would offset the benefits of a depreciated rupee and the diversified sourcing strategy of global companies."

¹ Excludes rating actions involving ratings with the Issuer Not Cooperating (INC) suffix
² Earnings before interest, taxes, depreciation and amortisation
³ 3-year CAGR – compound annual growth rate for three years from fiscal 2020 to fiscal 2023
⁴ Non banks include non bank finance companies and housing finance companies
⁵ Micro, small and medium enterprises