Reflecting an increase in credit ratings downgrades and a fall in upgrades, Crisil on Tuesday said its Rating Action Ratio declined marginally during the first half of this fiscal and pressures on corporate profitability are expected to continue. The ratio is an indicator of relative frequency of its upgrades and downgrade.
“Crisil’s Rating Action Ratio 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,” the agency said in a statement.
Crisil said the downward move was anticipated primarily on account of profitability pressures.
“Pressures on profitability have clearly been visible and are expected to continue. Crisil believes that the slowing down of demand across a wide range of sectors over the second half of 2011-12 could reduce its RAR further,” the ratings agency said.
Crisil’s downgrade rate increased to 3.1 per cent in first half of 2011-12 from 2.9 per cent in the last six months of 2010-11. The upgrade rate has also sharply moderated to 4.6 per cent in April-September period from 6.3 per cent in second half of 2010-11.
It said this proves that profitability pressures on Indian corporate entities and the contraction in margins is expected to continue because of high interest rates, wage and input costs.
“While the RAR has already started moving down on account of profitability pressures, we are expecting further downward pressure, primarily driven by demand moderation. Signs of demand moderation are visible,” Crisil Managing Director and CEO Ms Roopa Kudva said.
“Our analysis reveals that 10 of the top 20 industries (in terms of loans outstanding of the Indian banking system) are showing clear signs of slowdown in growth,” she added.
According to the ratings firm, consumption-linked industries such as automobiles, real estate, textiles, and retail have seen significant impact on demand.
“Crisil Research has cut its growth estimates for passenger vehicles close to decade’s lows of 2-4 per cent.
Investment demand-linked industries such as cement, capital goods, and construction have also witnessed decline in sales growth,” it said.
Crisil further said that while exports are buoyant so far, slowdown in the US and the uncertain environment in Europe are expected to result in a moderation in export growth in coming months.
“If the demand moderation leads to a lower revenue growth of 15 per cent in 2011-12, Crisil’s analysis on its sample portfolio of 5,500 rated companies reveals a clear weakening of credit quality of the Indian corporate sector,” it said.