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India Inc‘s credit quality is strengthening with credit ratio, or the proportion of rating upgrades to downgrades, increasing to 2.75 times in the first half of this fiscal from 1.79 times in the second half of last fiscal, said Crisil Ratings.
For this fiscal, most of the sectors (21 out of 26 corporate sectors) are expected to sustain robust balance sheets and healthy operating cash flows, it said.
The annualised upgrade rate of 14.5% outpaced the average of 11% for the past decade, while the downgrade rate of 5.3% was lower than the 10-year average of 6.5%. Notably, the rating reaffirmation rate continued to be stable at an estimated 80%.
On the improvement of private capex, Somasekhar Vemuri, Senior Director, Crisil, said, the capex level was Rs 3.2 lakh crore annually in 2019-20, which has grown to Rs 4.39 lakh crore average annual capex in the post Covid years.
“Some of the segments, sectors which are contributed in this capex, are cement, aluminium etc, And the demand is expected to continue in these sectors. Also, we have seen gas exploration as well as refining segments getting capex. Further, the government’s PLI schemes are also supporting to capex, in sectors like auto components, pharma, textile etc.”
The outlook
Fast-moving consumer goods (FMCG) and pharmaceutical formulations are expected to perform better than previous expectations. The FMCG sector is supported by recovery in rural demand, led by better monsoons and easing inflation. For pharmaceutical formulations, revenue growth this fiscal will be aided by improved realisations in the US generics market and the sustained volume uptick expected from new product launches.
Gearing will remain healthy (below 0.5 time) despite private sector capital expenditure (capex) showing signs of revival from the sharp decline seen during the pandemic. The capex is to accommodate the improving capacity utilisation, Crisil said.
Four corporate sectors — specialty chemicals, agrochemicals, textile cotton spinning and diamond polishers — which we had called out as facing headwinds from global macroeconomic conditions six months ago, remain constrained. However, they continue to have strong balance sheets.
Only one corporate sector — automobile dealers — is affected by relatively high leverage due to a recent significant build-up in passenger vehicle inventory.
All the 12 infrastructure assets are expected to have stable debt-protection metrics, while maintaining the revenue growth momentum.
Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer at Crisil Ratings, said the rating company is expecting GDP moderation in FY25 to 6.8% versus 8.2 last year.
“But more importantly regulatory prescriptions that we have seen, over the last few quarters, in the sense that the risk weights for the key sectors of unsecured loans and lending to higher rated NBFCs have gone up. This has made banks a little cautious about lending to those segments. We have clearly seen that the credit growth to unsecured segments and NBFCs has come down in the banking sector loan book. Hence we are seeing the moderation will be 14% compared to last year’s 16%,” he said on moderating bank credit growth.
Subodh Rai, Managing Director, Crisil Ratings, said rating upgrades continued to surpass downgrades, reflecting resilient domestic growth, supported by the government’s continued policy support towards infrastructure build, a revival of rural consumption demand and leaner corporate balance sheets. “As many as 38% of the upgrades were from the infrastructure and linked sectors. The primary drivers include acquisitions by strong sponsors and lower than expected debt, particularly in the renewables sector, reduction in project risks as road projects achieve critical milestones, progressive order execution in construction and a healthy order book in the capital goods sector,” he said.
Rating downgrades
On the other hand, the rating downgrades were spread across sectors. The downgrades seen in agricultural products and textiles sectors were due to volatile realisations and moderation in global demand, respectively. Furthermore, entity-specific liquidity issues, particularly in companies rated in the sub-investment grade category, also contributed to the downgrades.
However, capex intensity — measured as capex over Ebitda1 — remains moderate, averaging about 50% over fiscals 2024 and 2025 as against the decadal high of 72% during fiscal 2016. This, together with lean corporate balance sheets, implies that India Inc has significant financial headroom to support a broad-based capex as utilisation levels rise.
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