CRISIL Ratings credit ratio moderates to 2.19 as expected amid global slowdown, high inflation
The CRISIL Ratings credit ratio - of upgrades to downgrades - moderated to 2.19 in the second half of fiscal 2023 from 5.52 times in the first half.
Our Ratings Round-Up report for the first half of fiscal 2023 had presaged rising global inflation and the resultant interest rate hikes could temper growth and weigh on the credit ratio.
In all, there were 460 upgrades and 210 downgrades across sectors in the second half. Though the upgrade rate fell ~320 basis points (bps) from the first half to 13.46%, it was still higher than the 10-year average (till fiscal 2022) of 10%.
Corporate balance sheets have strengthened significantly and gearing levels remain at decadal lows. The median gearing of the CRISIL Ratings portfolio is expected be ~0.45 time by fiscal 2024 end, marking a correction from fiscal 2023.
That, along with steadfast domestic demand and the government's unwavering focus on infrastructure spending, has kept the upgrade rate elevated.
These reasons lend a positive bias to the credit quality outlook of India Inc.
The downgrade rate, on the other hand, has gone up to 6.14% and almost reverted to its 10-year average.
Volatile commodity prices have impacted profitability, particularly of micro, small and medium enterprises (MSMEs), while export-oriented sectors face headwinds from a slowdown in their major markets. MSMEs, which benefited from policy interventions during the pandemic, will now have to contend with higher input cost and increasing interest rates - just as repayments on restructured loans begin.
About 60% of the downgrades in the second half of fiscal 2023 were in the sub-investment grade category, and these largely comprised MSMEs. As much as ~70% of the downgrades were because of decline in profitability and/or liquidity pressure.
The third edition of the CRISIL Ratings proprietary Corporate Credit Health Framework analyses the operating cash flow strength (measured by expected change in absolute Ebitda1) and balance sheet strength of the top 44 sectors for fiscal 2024 over fiscal 2023. These sectors account for ~70% of the rated debt (excluding the financial sector).
1 Earnings before interest, tax, depreciation and amortisation
