The pressure on profitability arising from slowdown in demand and high interest rates have resulted in an increasing pace of downgrades and a sharply declining pace of upgrades in the first half of 2011-12, said a report by rating agency Crisil.
There has been an increase in Crisil's downgrade rate to 3.1 per cent in H1 2011-12 from 2.9 per cent in H2 2010-11. The upgrade rate has also sharply moderated to 4.6 per cent in H1 2011-12 from 6.3 per cent in H2 2010-11.
The contraction in margins is expected to continue because of high interest rates, wage and input costs, Crisil said.
Out of a rated portfolio of 7,500 companies, Crisil upgraded 313 companies and downgraded 207 companies in the first half of FY2012. In the whole of 2010-11, out of 6,100 rated companies, 605 were upgraded and 269 were downgraded.
Crisil's Rating Action Ratio (RAR, an indicator of relative frequency of its upgrades and downgrades) declined to 1.03 times in the first half of 2011-12 from 1.10 times in 2010-11. This trend reflects an increasing pace of downgrades and a sharply declining pace of upgrades.
While the RAR has already started moving down on account of profitability pressures, Crisil is expecting further downward pressure, primarily driven by demand moderation.
Consumption-linked industries such as automobiles, real estate, textiles, and retail have seen significant impact on demand. Investment demand-linked industries such as cement, capital goods, and construction have also witnessed decline in sales growth.
While exports have been buoyant so far, slowdown in the US and the uncertain environment in Europe are expected to result in a moderation in export growth.
Access to global funding has been impacted due to risk aversion among global investors. Going ahead, this will impact the balance sheets of companies and also credit quality in the second half of the fiscal, said a Crisil analyst in a teleconference.
With demand likely to moderate and profitability likely to be under pressure, the rating action will be weaker and the RAR is most likely to go below 1.03 times.