Corporate Apr 2, 2013
Mumbai: Credit quality trend of corporates will improve marginally this fiscal on the back of easing demand pressures, fall in commodity prices and possible reduction in the interest rates, Crisil said today.
"We believe that corporate India's credit quality trends will improve marginally in FY14 with demand pressures easing, commodity prices cooling off, and interest rates declining during the year," Crisil Ratings senior director Pawan Agrawal told reporters in a conference call here today.
He, however, said though the pressure would ease, it would not go away, resulting in more number of rating downgrades than upgrades in the year. As per the rating agency, credit ratio (the ratio of upgrades to downgrades) stood at 0.62 times in the second half of last fiscal compared to 0.66 percent in the first half.
"The pace of the decline in credit ratio has moderated and the ratio has been largely stable in H2 (second half) of FY'13, unlike in the first half, when it declined sharply to 0.66 from 0.91 in H2 of FY'12," Agrawal said. The report said the default rate had also been largely stable in both halves of last fiscal. On the number of rating downgrades to upgrades, the agency said downgrades had continued to outnumber upgrades in H2 of FY'13 with 616 downgrades against 379 upgrades.
"The downgrades were driven largely by slowdown in demand and tight liquidity, resulting from stretched working capital cycles. Companies in the textile, power, construction, engineering and capital goods sectors accounted for a third of the downgrades," he said.
He also said the rating upgrades were supported by improved business performance following stabilisation of the recent capacity expansions and discipline in debt servicing. "Sectors that have had the highest upgrades are the pharma and packaged foods industries," the report said. On the interest coverage ratio in the next fiscal, the agency said it will improve to four times in FY'14 from 3.7 times last fiscal. It, however, said that while some companies with prudent capital expenditure and sound liquidity management would do well next fiscal, companies with high debt and longer working capital cycle would remain vulnerable.
"Companies in sectors like textiles, power and construction will remain vulnerable in the next fiscal. There is a need of sizable equity infusion in these companies to improve credit quality," Crisil Ratings director Somasekhar Vemuri said. However, both analysts said that profit margins are likely to improve in the next fiscal. About bad asset and restructuring seen in the banking system, they said the pressure would remain in the current fiscal though the pace would come down.
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