The credit ratio, the number of corporate credit upgrades compared with downgrades, moderated in the second half of the financial year (H2FY23) owing to global headwinds such as rising inflation and resultant interest rate, slowdown in external demand, spillovers from the Ukraine-Russia war and global financial uncertainties which have tempered domestic growth.

While the upgrade rate fell 320 bps from H1FY23 to 13.46 per cent, the rate was still higher than the 10-year average of 10 per cent led by steadfast domestic demand and the government focus on infrastructure spending, as per Crisil.

The downgrade rate rose to 6.14 per cent, reverting almost to its 10-year average rate, led by volatile commodity prices and global slowdown which have impacted profitability, particularly of MSMEs and export-oriented sectors. About 60 per cent downgrades were in the sub-investment grade category, which largely comprise MSMEs and 70 per cent downgrades were due to lower profitability or liquidity pressure.

Ups and downs

CARE Ratings said that the moderation in credit ratio for investment grade companies was narrower from 3.90 to 2.99, whereas for below investment grade companies fell from a peak of 3.54 to 2.22 in H2FY23. The upgrade rate for export-oriented sectors halved to 12.2 per cent in H2FY23 from 21.8 per cent, whereas the downgrade rate increased to 7.0 per cent from 3.0 per cent. However, some export-oriented sectors such as pharmaceuticals and electronic components continued to benefit from production-linked incentive schemes and increased global sourcing from India.

Domestic demand driven sectors such as automotives and automotive components, hospitality, healthcare, pharmaceuticals, dairy products, textiles and steels saw more upgrades than downgrades, with their operating cash flows expected to grow steadily over FY24 led by volume growth.

CRISIL said infrastructure sectors such as highway tolling, renewables and construction are seen logging favourable trends either in operating profits or leverage, with their credit quality outlook expected to range between ‘positive’ to ‘stable’.

CareEdge said its credit ratio for the manufacturing and services sector during H2FY23 was at its second highest in the past five years at 2.69, down from the peak of 4.59 in H1FY23. In turn, the infrastructure sector’s credit ratio improved to 3.10 in H2FY23 from 2.24, driven by the power and transport infrastructure segments.

Upgrages to continue

In FY24, upgrades are expected to continue outnumbering downgrades, albeit at a slower pace, led by sustained recovery in domestic consumption, delevraged balance sheets, easing of commodity cost pressures and thrust on infrastructure, the ratings agencies said.

However, they remain caution as the full impact of the interest rate hikes on domestic demand is yet to completely play out, and as higher-than-expected global slowdown could further impact exports in addition to inflationary pressures and emerging uncertainties in the global financial system.