Corporate credit quality continues to be strong in the first half
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Leaner balance sheets driven by healthy cash flows and muted corporate capex
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.”
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