India Inc’s Credit Quality Improves As Companies Stay Away From Capex
Credit quality of Indian corporates recovered in the first six months of the financial year largely because companies kept away from capex.
CRISIL’s credit ratio—the number of ratings upgrades to downgrades—improved to 1.88 in six months to September from 1.22 times in March, according to the ratings agency. For rolling 12 months, the credit ratio was 1.59, and the debt-weighted credit ratio—debt upgrades to downgrades—was at 1.94, it said. Assessing the credit ratios on a 12-month basis “obviates period bias and indicates the trend could become structural in nature”, CRISIL said.
Both the ratios exceeded 1 for the first time in five years, indicating that “the trend of recovery in credit quality has sustained for a year now”, Pawan Agrawal, chief analytical officer at the ratings agency, said in the release.
The improvement is on expected lines and has come mainly on better financial indicators, as Indian companies shied away from capital spending given unused capacity in plants across sectors, said Agrawal. “We expect this trend to continue till demand firms up. Lower interest costs will provide further support,” he said.
Private investments in India have been crippled by mounting corporate debt and inadequate capacity utilisation. Lenders, already sitting on more than Rs 8 lakh crore of bad debt, are unwilling to lend more. Policymakers and industry leaders have stressed the need to spur private sector investment to turn around India’s slowing economy as growth fell to the lowest in three years.
“Private investment, which was already low because of large headroom in capacity utilisation, would weaken further if growth slows afresh,” CRISIL cautioned.
The ratings agency’s universe of companies has shown a “steady improvement in capital structure and debt protection metrics over the past three years”. The recovery has been broad-based as median interest cover of companies improved to 2.58 in fiscal 2017 from 2.28 in fiscal 2015. A coverage ratio of more than one means the company will be able to service its interest obligations for the current year.
However, the high level of stressed assets in the banking system, at around Rs 11.5 lakh crore at March-end, continues to “choke the economy”, according to the ratings agency.
"The good ones is where we have been seeing improvements over the past year, and which should sustain. The bad one is where there are sizeable stressed assets," he said in the media statement.
Barring stressed assets, which remain a key monitorable indicator, CRISIL expects factors such as lower interest rates, improved working capital cycle, stable commodity prices and return of domestic demand to further boost corporate credit quality.
However, it warned that the credit ratio and debt-weighted credit ratio may moderate from here on and track gross domestic product growth due to the uncertainties from the Goods and Services Tax rollout, weak domestic investments, and subdued exports growth.