Mumbai: Upgrades continued to exceed downgrades during the October-March rating reviews of Indian companies despite a rise in borrowing costs and supply constraints caused by the war in West Asia and the Red Sea crisis.
Domestic consumption, demand across several sectors, government spending on public infrastructure, and healthy balance sheets helped in improving credit profiles, rating agencies said. Major rating companies have recorded more upgrades than downgrades, although the pace moderated sequentially.
The ratio of upgrades to downgrades, is stabilising at pre-Covid levels. For Crisil, the largest rating company, the ratio improved to 1.79 during October- March of 2023-24, compared with 0.77 in October-March of 2019-20. It was 1.21 in the first half of FY20, before the onset of the pandemic.
The ratio for other major rating agencies was above one, although there was a sequential decline, likely due to the base effect. For ICRA, the number of instances of defaults dipped to 5 in FY24, compared with 22 in FY23 and 42 in FY22.
“Corporate India’s performance in FY24 remained on track, with upgrades continuing to outpace downgrades significantly” said Arvind Rao, head of the credit policy group at India Ratings.
Upgrades were driven by sectors such as roads, renewables, construction, auto components, hospitality and education. Export-oriented sectors such as textiles and marine exports saw more downgrades because of global headwinds.
“Pressures on operating margins are the primary reasons for downgrades,” said Somasekhar Vemuri, senior director at Crisil Ratings.
For FY25, the credit quality outlook remains positive, driven by domestic demand, low corporate debt levels and tailwinds from the ongoing infrastructure build-out.
With capacity utilisation peaking, expected interest rate cuts and deleveraged balance sheets, a broad-based pick-up in corporate capex is in sight. Crisil expects the central bank to cut rates in the second half of this fiscal.
“Indian corporates have demonstrated resilience amid the lingering global challenges, manifesting in the uptick in the ratio. Their performance is supported by strong domestic demand, enhanced profitability, scaling up and project commissioning of infrastructure projects,” said Sachin Gupta, chief rating officer at CareEdge Ratings.
In the banking sector, the asset quality of banks and NBFCs has also been at its decadal best with the profitability and the capitalisation indicators expected to remain healthy in the near term. However, a little uptick in delinquencies is expected due to some possible repayment issues in unsecured loans.
“The key downside factors that could throw a spanner in the works would be how the monsoons pan out this year and how the complicated geopolitical landscape evolves,” said K Ravichandran, chief ratings officer at ICRA.
